Steemit Crypto Academy Contest / SLC S21W5 : Advanced Strategies Using On-Chain Data and Sentiment Indicators

On-chain data metrics are the secret whisper of the blockchain and give you a clue on what's really behind the scene. One of the best clues is in wallet activities. The sudden spikings in active wallets sound like an invitation to join a party for traders-more and more people are inquisitive about the token. In contrast, whenever wallets are quiet, perhaps the hype is fizzling out.

Then there's inflow and outflow to and from exchanges. If tokens are piling into exchanges, they're probably getting ready to sell, which is a downward pressure on prices. If tokens are leaving exchanges, it is like people hiding them under their mattresses; this is a good sign because they are holding them for the long term.

Binance Interface

Another interesting story is the token holding distribution. When whales (big holders) begin splashing their tokens into smaller wallets, it may be an indicator that they are cashing out, which might bring market shifts. However, when whales are hoarding, it is a very strong signal that they are expecting prices to skyrocket.

These metrics are like pieces of a puzzle. Taken individually, they tell small stories. Together, they open up a bigger picture of the mood in the market. For example, when tokens are pouring into exchanges while wallets are buzzing with activities, it's time to watch out for some drama—it might be time to watch out for price swings.

The best thing is that these clues are not reserved for experts. A little practice is going to make anyone read them. It is like solving a digital mystery through breadcrumbs.

By paying attention to such patterns, one is not following the crowd blindfolded but predicts precisely where that crowd is headed. It's somewhat like getting ahead in a marathon without knowing what other people haven't discovered yet. Short version: On-chain data basically makes the market less of a game of guessing and more of an adventure for strategy. Who would not feel like being a Sherlock Holmes in the world of trading?

These metrics are mood rings to the market, revealing what traders are thinking in a bull run. Let's break it down.

1. Wallet Activity: Increased wallet activity during a bull run is like people crowding into a concert. It's exciting and participation-based. The higher wallet activity could be seen as more people getting interested and feeling confident in the token, further fueling the bull run.

2. Exchanges Inflows: A high tokens inflow to an exchange during a bull run would be similar to someone leaving early from a party, and this may indicate that a significant number of traders are preparing themselves for selling. This will thus indicate potential resistance in or a slowdown of the rally.

3. Exchange Outflows If coins are leaving exchanges, then there is great confidence in how the market will surge upwards since traders prefer to hold onto their assets for long-term purposes.

4. Distribution out of Token Holding: When whales and large holders continue to hold and accumulate it is sort of witnessing a second wave of VIP ticket sales for the previously sold-out event. Minor investors will most likely become confident of the prospect of an extended bull run. But once the whales begin distributing, it can well turn out to be the event of topping up.

5. Network Activity: Increased overall transactions, therefore generally on-chain activity, manifests a lively marketplace in action-it feels like everyone is participating and everyone is ecstatic, which generally goes with upward trends.

6. Social Signals: Combine these with sentiment indicators like the Fear & Greed Index, and you’ll have a powerful tool to sense when the market is getting overly euphoric or cautiously optimistic. In short, these metrics behave like a GPS when it comes to market sentiment in a bull run. They do not only tell you where the market is; they give hints on where it is headed next.

Market sentiment an emotional and psychological attitude with regard to a particular market on behalf of traders and investors. It is in some ways crucial for the drives and price movements, oftentimes acting as a form of self-fulfilling prophecy.

Sentiment indices - such as the Fear & Greed Index or perhaps an analysis of social media can then be used to determine whether trades are bullish or bearish in nature. These tools help investors steer through the unpredictable nature of the markets, giving them possible reversals, breakouts, or trends.

But let's dive deeper in how these indicators reveal to the market's mood and influence trading strategies.

The Fear & Greed Index is basically the mood thermometer of the market, measuring collective emotions, which are ranging from extreme fear to extreme greed.

Extremes of fear typically signify oversold markets as investors are overly cautious and take themselves out of trades that could bring about price drops. On the other hand, excessive greed may imply the market is overbought and that it's on its way to a correction.

From this, a trader will be able to tell whether to act cautiously or capitalize on emotional overreactions. For example, the most common strategy derived from this indicator is "buying the fear and selling the greed".

Social media channels like Twitter, Reddit, and even Steemit are full of chatter around the market. Sentiment analysis through keyword tracking, hashtags, and trending discussions around particular tokens or markets is important.

Positive social media sentiment can perpetuate a bullish market environment, particularly when it is about a price rally or upcoming news. Conversely, negative sentiment due to fear, uncertainty, or dissatisfaction usually coincides with bearish conditions.

However, one must weed out hype from the grain of genuine sentiment because social media does sometimes create false narratives or exaggerations.

Such sentiment indicators give traders an action. When the market conditions are bullish, it will most likely be overheated and signal caution or partial profit-taking during high greed in the Fear & Greed Index, when the social media mood is strongly positive.

The opportunities of long-term buying usually lie in bearish markets; panic often creates undervalued assets during high fear and negative chatter.

These tools enable traders to be in line with the sentiments of the market, therefore better positioned to detect trend reversals or continuing trends.

Not infallible, sentiment indicators bring to trading a psychological element that works together with technical and fundamental analysis, hence placing investors one step ahead of the crowd.

Apart data

Sentiment indicators, such as the Fear & Greed Index and social media sentiment analysis, have often demonstrated their ability to predict market reversals by capturing extremes in market emotions. Here are a few notable examples where these tools provided valuable foresight:

Fear & Greed Index and the Bitcoin 2017 Peak
During the last bull run of cryptocurrencies in late 2017, the Fear & Greed Index for Bitcoin reached extreme levels of greed when Bitcoin's price was near its all-time high of nearly $20,000. This overwhelming optimism was a sign that the market had become overly euphoric and speculative buying was fueling prices higher.

Later, Bitcoin had a massive correction and dropped to under $10,000 within a few months. Traders who identified the precursors from the Fear & Greed Index would have been in an excellent position to get out of the way before the correction by taking profits off the table before the turnaround.

Social Media Sentiment and the GameStop Short Squeeze

GameStop (GME) stock saga early in 2021 was driven through social media platforms such as Reddit where retail traders coordinated to make a short squeeze.

A tidal wave of positive sentiment and mass excitement swept onto the r/WallStreetBets forum, shooting the stock from a low $20 to above $400 within weeks. But sentiment turned to dread in regulatory action, then market manipulation, before discussions turned cold on the stocks as the euphoria finally ran its course.

An analysis of the social media sentiments could have warned investors that the rally was headed for a crash after it began falling off.

Bitcoin March 2020 Crash and Recovery

When the COVID-19 pandemic hit in March 2020, the Fear & Greed Index had spiked to extreme fear as Bitcoin's price plummeted from $10,000 down to $4,000. For the contrarian investor, though, this was a buying opportunity since they perceived the market as being oversold.

The following years witnessed the price of Bitcoin skyrocket to unprecedented levels, recompensing those who were able to buy in by using the Fear & Greed Index as a contrarian indicator.

Tesla's Stock in 2020

Tesla's stock saw a rapid rise in 2020 due to positive social media sentiment and enthusiasm about its induction into the S&P 500. As the sentiment continued to soar, touching euphoric levels, analysts were already warning of a pullback when the memes and speculative hype on Twitter were at its peak. Following the induction, the stock saw a temporary correction that validated the sentiment-based cautionary signals.

Lessons from Historical Reversals

These examples highlight the importance of recognizing extreme sentiment levels as potential turning points. While sentiment indicators shouldn't be used in isolation, combining them with technical and fundamental analysis can help traders better time entries and exits, turning market psychology into a strategic advantage.

The chart displays historical examples of sentiment indicators predicting market reversals. The x-axis shows specific market events, while the y-axis represents both the sentiment level and the market reversal percentage.

Historical example of sentiment indicator

Four different types of events in the market are analyzed: peak Bitcoin 2017, short squeeze GameStop 2021, the crash Bitcoin March 2020, and the rally Tesla 2020. Each corresponds to a unique level on the sentiment meter, spanning from "Extreme Greed" to "Euphoric Sentiment".

The orange bars represent a level of sentiment, while the line in blue indicates the percentage level of market reversal. Quite interestingly, the above chart shows that high-level sentiment often correlates with higher levels of market reversions. For example, even the Bitcoin 2017 peak and the GameStop 2021 short squeeze, which was characterized with extreme greed and positive hype, respectively followed by significant market declines.

In contrast, the Bitcoin March 2020 crash and the Tesla 2020 rally, both related to extreme fear and euphoric sentiment, respectively, have been followed by substantial market rallies.

On average, this chart implies that sentiment indicators can be pretty useful for predicting the markets' reversal. But all these indicators are not completely foolproof and have to be applied in line with other technical and fundamental tools used for the analysis.

On-chain data and sentiment indicators may appear like apples and oranges, but together they are a perfect fruit salad to understand market sentiment.

On-chain data gives you the hard facts, the numbers and trends of what is happening in the blockchain, while sentiment indicators act like your emotional weather forecast, showing how people feel about the market. When combined, they give both a rational and emotional view of market movements.

On-chain data is like the heartbeat of the market. Metrics like wallet activity, exchange inflows, and token holding distribution all provide a live pulse of what's happening in the market. For example, a sudden increase in wallet activity may signal excitement brewing or panic selling.

On the other hand, sentiment indicators, such as the Fear & Greed Index or social media chatter, measure the mood swings of the market. These tools capture the collective psychology of investors. Extreme greed often precedes a correction in the market, and fear can often hint at opportunities for bargain hunters.

The magic is in the mix of these two perspectives. If on-chain data shows increasing wallet activity and sentiment indicators report extreme fear, it may mean that smart money is quietly accumulating while dumb money panics. This could be a mix that signals a reversal to bullish.

Alternatively, if on-chain data displays large token inflows to exchanges combined with extreme greed, this may be a red flag for a market top. This could be people preparing to sell en masse, and the sentiment data amplifies that warning.

It complements the approach, where it will help traders better understand a move and refine strategies. One may consider it as listening to the body language of the market through on-chain data and gossiping through sentiment indicators.

Together, they can draw a fuller, more actionable picture. So the next time, let numbers meet feelings for a market strategy that's both smart and intuitive!

Let’s dive into the Fear & Greed Index and see what it tells us about the crypto market today, especially for Steem/USDT.

Fear and greed Index for today "As a whole crypto market"

Today’s score is 75, signaling Greed. People are optimistic, wallets are buzzing, and everyone seems to think prices will continue to climb. But wait! Yesterday, it was even hotter at 79—Extreme Greed! Talk about FOMO (Fear of Missing Out).

Last week? Well, it was at 83, also Extreme Greed. Back then, the market was roaring with overconfidence. But zoom out to last month, and the index cooled a bit to 72, which still lands in the Greed territory. Clearly, the market has been on a long, greedy streak, with buyers flooding in, hoping to ride the bullish wave.

So, What does this mean for Steem/USDT? A high greed level often implies that everybody is expecting the market to rise and is piling in. Wallet activity and token flows would likely show increased accumulation or inflows of exchange, which would continue the rally. However, this can sometimes be a warning sign of a bubble; it would burst when the greed runs out.

Here's the fun part: when everyone's being greedy, that's the moment the smart traders take heed. A reversal might be coming along, and correlating that with on-chain information, such as movement tokens, can give you a much more complete picture. If all the sudden Steem tokens are flowing to an exchange, it might mean whales getting set up to sell.

In short, the index screams optimism but savvy traders know better. Greed can be a guide or a trap—time to watch the data and act wisely!

Money Flow analysis

Let’s dive into this Binance money flow analysis for STEEM, which is as colorful as the donut chart presented. It reflects a tug-of-war between buyers and sellers over a 1-day period, and here’s what it tells us:

Buy vs. Sell Volume

The total buy volume is 5.80 million STEEM, while the sell volume is significantly higher at 8.94 million STEEM. Clearly, sellers are dominating the market today, outpacing buyers by over 3 million STEEM. This could signal bearish sentiment for STEEM, as traders are offloading their holdings. However, such heavy selling pressure might also attract bargain hunters looking for potential rebounds.

Large Orders

Large buy orders account for 858,909 STEEM, while large sell orders stand at a whopping 1.57 million STEEM. Institutions or whales appear more inclined to sell than buy, which typically raises concerns about market confidence. Whale moves often shape trends, so this discrepancy warrants close attention.

Medium and Small Orders

Medium buy orders, totaling 2.50 million STEEM, are almost 40% lower than the medium sell orders of 4 million STEEM. Meanwhile, small buyers add 2.44 million STEEM, with small sellers slightly higher at 3.37 million STEEM. This shows retail traders are participating actively, yet their buying activity isn’t enough to counterbalance the broader sell-off.

Net Inflow/Outflow

The net inflow is -3.15 million STEEM, confirming more STEEM is leaving wallets than entering. A negative net flow like this often indicates sustained selling pressure as tokens move toward exchanges, typically for liquidation purposes.

What It Means

This data suggests bearish sentiment in the STEEM/USDT market. However, sharp sell-offs can lead to oversold conditions, potentially creating an opportunity for buyers to step in. If sentiment indicators like the Fear & Greed Index shift to "Fear," it could signal a reversal ahead. This is why pairing on-chain metrics with sentiment indicators is crucial for a comprehensive analysis.

Last 5-day flow analysis of Steem/Usdt

This chart is a 5-day large inflow analysis for STEEM on Binance, which depicts the major market trends and investor behavior. The net large inflow over the last five days is -1.12M, meaning that more STEEM was sold than bought by large traders during this period. Such a negative inflow signals bearish pressure, as major market participants were offloading their STEEM holdings.

On the first day, there was a positive inflow of 492,599.00, with strong buy interest. But then, this momentum reversed itself as there was a net outflow of -172,916.20 on the second day, suggesting profit-taking or market hesitation at the very beginning. There was a slight recovery on the third day with an inflow of 238,581.00, indicating optimism or short-term opportunities.

The fourth day saw a dramatic outflow of -986,137.60, marking significant sell-offs and likely a reaction to broader market conditions or internal STEEM developments. This negative sentiment continued into the fifth day, with an additional outflow of -694,397.20, further amplifying bearish sentiment.

It clearly depicts that large players are the primary movers in STEEM trading, causing price movements to be quite volatile. The fluctuations further call for tracking inflows and outflows to anticipate market trends and make the right decisions.

The whales always monitor the price movement and indicators of assets such as STEEM. Hence, in evaluating market trends, technical analysis is crucial.

It takes a close look at key price levels, moving averages, and Stochastic RSI trends on the charts of STEEM/USDT in 4-hour, daily, and weekly timeframes to predict further movements.

4h Time frame

The STEEM/USDT 4-hour chart shows a short-term upward momentum; price is now above all key moving averages, for example, MA 7 at $0.2538 and MA 25 at $0.2460. This looks like a strong positive trend, but Stochastic RSI near 20.51 indicates the possibility of an oversold state, meaning a decrease in short-term purchasing power. In such a situation, it often tends to experience some kind of retraction or consolidation before making further upwards movement. If $0.25 holds as support, it may become a great launchpad for a renewed rally.

Daily time frame

On the daily chart, a breakout above the MA 25 at $0.2034 and MA 99 at $0.1821 confirms a medium-term bullish sentiment. The price has climbed steadily, now resting around $0.2599, supported by significant volume activity of 5.551M. On the other hand, with a **Stochastic RSI of 90.49, there is an indication that this market is overbought and might face resistance closer to $0.27, yet the alignment of moving averages continues to support the notion of bullish momentum if its buyers continue to be exuberant.

Weekly time frame

The weekly chart provides a greater perspective as STEEM manages to hold above the MA 25 at $0.1873 in the recovery trend. At current price of $0.2593, there is a strong increase that is supported by high weekly volume of 43.444M, which shows significant interest from larger market participants. However, Stochastic RSI at 92.96 reveals overbought conditions, usually a sign of incoming profit-taking or consolidation. If STEEM fails to break the next resistance level near $0.30, a retracement to support at $0.20 or $0.24 could occur.

Overall, price action on any time frame displays strong bullish momentum, but caution is urged due to overbought readings.

To an answer this question i am designed solid strategy in graph for , the sentiment-based trading strategy for Steem is designed by combining on-chain data analysis with sentiment indicators to forecast and act on market trends.

The strategy is organized around two key phases—bullish and bearish sentiment—and uses specific criteria to determine optimal entry, exit, and risk management.

Sentiment-Based Trading Strategy

Bullish Sentiment Phase:

Entry Criteria:

• When the price of Steem breaks above a key level of support, like $0.240 in the 4-hour chart (as expressed by MA Crossover), it is perceived to be in a for bullish trend.
• The Stochastic RSI indicator (in blue) crosses above the 20 level, meaning that momentum is piling up for an upward trend. Ideally, this occurs when Steem's price is above both the 50-day moving average (MA) and the 200-day MA, confirming a positive trend.

Exit Criteria:

• Close positions when the price reaches overbought levels on the Stochastic RSI (above 80), which would potentially reverse or consolidate. In our chart, this coincides with prices around $0.260—a region where resistance has been met previously.
• Another point of exit would be if Steem's price breaks below the 50-day MA and the Stochastic RSI breaks below 50, confirming that the bullish momentum is weakening.

Risk Management:

• Set stop loss just below the 50-day MA or recent support level around $0.240 to cover in case the bullish trend reverses.
• Position sizing can be adjusted based on the volatility reflected in the volume section of the chart. For instance, if volume is significantly higher during a bullish period, it can justify larger position sizes.

Bearish Sentiment Phase:

Entry Criteria:

• When the price of Steem breaks below $0.250 and creates a lower low, it activates a bearish phase. If the Stochastic RSI falls below 50, this further confirms that a probable downtrend may occur.
• A continuous downward movement, wherein the price stays below the 200-day MA, signals bearish conditions. If the Stochastic RSI falls below 80, the market sentiment would be pessimistic, and the momentum is in favor of short-selling.

Exit Criteria:

• Exit short positions when the Stochastic RSI crosses above 50, or at the first bullish reversal patterns, which are typically a higher high, or when it breaks back above the 200-day MA.
• Also pay attention for a price push through prior resistance levels around $0.260 for possible indications of the termination of the bearish phase, at least, and a probable bullish reversal in place.

Risk Management:

• For bearish trades, place stop-loss levels above $0.260 or any major resistance level to avoid extreme losses in case of an unexpected price reversal.
• Manage the size of your trade based on the intensity of the bearish momentum. The more volume that accompanies a bearish trend, the better confirmation it gives and, hence, the position size can be slightly larger.

Market sentiment analysis can be a powerful tool, but it's also not without its challenges. Some of the biggest problems with these analyses is that they don't respond in a prompt manner. Prices can already make a turn when the direction of the market sentiment comes out clearly. It is like taking a bus that has gone halfway in the street.

Another issue is misleading signals. Sometimes, the sentiment indicators may indicate positive signals, but the market may still be on the way down. It's like seeing a smile on someone's face but later finding out they are actually hiding their true feelings.

Sentiment analysis can also be too swayed by short-term noise. Social media posts, tweets, or even random news can skew the readings, leading traders to make decisions based on a temporary emotion.

Then there's the human factor. Most of the time, sentiment analysis uses crowd behavior, which isn't always rational. Everyone being scared will create panic-selling even if the market is healthy.

Market sentiment is also contradictory at times. While some traders are extremely bullish, others are bearish. It becomes like being stuck in the middle of a tug-of-war, confused as to which direction to take.

Lastly, sentiment sometimes reflects the old. By the time sentiment reveals a trend is present in the market, things may be already too far along. Traders are left scrambling to try to catch up, a bit like trying to predict the end of a movie after the credits roll!

The reliability of sentiment-based trading strategies can be improved as traders are effectively navigated in the market. Here are some tips to boost your approach:

1. Aggregate Multiple Indicators: Avoid using a single sentiment indicator. Combine on-chain data, social media sentiment, and market analysis for a more holistic view. It is like having a map and a GPS to navigate to your destination – more data means fewer wrong turns.

2. Timing Your Analysis Correctly: Timing is critical in sentiment analysis. Look to capture sentiment when the majority of trading activity occurs, especially during market open times. The sentiments before and after market hours are less trustworthy, almost like trying to judge the mood of the party when everyone has already left.

3. Concentrate on Long-term Sentiment: Short-term sentiment could be volatile and misleading in many ways. So just zoom out, ignore such minor shifts, and watch for long-term trends instead. It's like observing the bigger picture instead of worrying about one stroke being a little messy.

4. Diversify Your Data Sources: Leverage a mix of data sources – from social media sentiment analysis, news headlines, to on-chain analytics – to gain a better-rounded understanding of market moods. One data source is like trying to read a book with only half the pages!

5. Avoid extreme reactions based on the extremely bullish or bearish sentiment. Often, extreme sentiment could be the manifestation of a market bubble or panic sell. Do not jump into this blindly and look for more confirmation elsewhere. Often, the biggest noise-makers are the most unreliable.

6. Adapt to Market Conditions Sentiment could change with market conditions. Be prepared to adapt your strategy based on the volatility in the market, trends, and news. Flexibility in your strategy is what matters-the market is a moving target!

By combining these tips, sentiment-based trading strategies can become more reliable, helping you stay ahead of market shifts and make smarter trading decisions.