To a new trader, the crypto market can be incredibly overwhelming.
It might seem as if the nouveau crypto-riche simply recognized the obvious potential of this new-age currency. And since everything’s 20/20 in hindsight, you’re probably kicking yourself for not buying bitcoin in 2011.
But in reality, crypto trading is about a whole lot more than just intuition. There’s a certain science to improving your chances of success in the crypto market, and that science is known as technical analysis.
Technical analysis is the most popular between the several approaches that cryptotraders use to analyze market sentiment. It allows them to get a better understanding of market movements and isolate trends to make educated predictions and wiser trading decisions.
Basically, technical analysis uses the past to predict the future and it assumes all the data is in the price. It uses technical indicators to look at a coin’s history by studying its price charts and trading volume, thereby helping traders extract valuable information out of those price charts.
Fundamental analysis, on the other hand, determines whether a coin is over or undervalued based on the company’s actions. It can include a variety of variables, such as recent news, regulatory issues, or any other coin-related news stories.
Today, we’re going to break down technical analysis and give you a step-by-step guide to the basics.
First, you’ll want to familiarize yourself with candlestick charts. The illustration below shows how to read them.
Here, the name gives you a clue as to what trend lines are about — they describe the direction an asset is trending over time. For crypto markets, trend lines are more ambiguous due to their highly volatile nature. Because crypto coin prices are so unstable, it can be tough to isolate trend lines.
Yet, trend lines are designed to smooth out the volatility of an asset, helping traders understand the price movement over a specified period of time. Like any graph, it’ll show a positive slope if prices are increasing, and a negative slope if prices are decreasing. Technicians overlook volatility and find an upward trend if they observe a series of higher highs or a downward trend if they observe a series of lower lows. The trend line can also be straight, which signifies a steady price of the token, or what is called - consolidation.
That brings us right to support and resistance, which compliment the trend lines. These two opposite concepts refer to the price levels on charts and act as a kind of floor and ceiling (respectively) for the price of any given asset, with a high possibility of disrupting a current trend. They’re two of the most influential aspects of technical analysis — understanding support and resistance levels allows traders to accurately identify potential opportunities for both the short term and the long term.
The support line is set by buyer demand. Traders can look at the chart to identify at which levels the downtrends turn to uptrends. The more incidents of support level changes the momentum in the past – the stronger the support line is. Resistance lines are the opposite of support lines: they’re the point at which upward momentum reverses to downward momentum.
Finding support and resistance levels can be done by observing the charts of an asset and identifying the levels at which the price seems to be resisting the change. For traders, these levels can be very valuable for setting trade entry and exit positions.
Moving Average (MA) is a widely used indicator that helps traders better understand an asset’s overall momentum. For example, when the price of a coin crosses below the moving average, it indicates of a bear (negative) trend. Conversely, when the price crosses above a moving average, it indicates an bull (positive) trend. It’s simply the average price of an asset over a predetermined period of time. For example, you can find the 10-day moving average by calculating the average price of the asset for each of the past 10 trading days.
It is one of the simplest, yet most powerful, technical indicators. Once the moving average has been plotted on the chart, it can be used to help traders spot trends.
But not all moving averages are the same. Generally speaking, they fall into two main categories: simple moving averages (SMA) and exponential moving averages (EMA). The difference between the two comes down to time. When calculating the EMA, more recent price values are given more weight. Alternatively, the SMA is a whole lot more straightforward — all price values are equally weighted.
If you’re totally new to technical analysis, we recommend starting by looking at longer-term MA. For instance, 50 days, 100 and 200 days. But regardless of timeline,the underlying calculations for all moving averages always remain the same.
Example of a 50 day simple moving average:
Trading volume is the amount of money changing hands for a specific asset over a specified period of time. High trading volume usually means higher liquidity and better order execution.
Every time a trader makes an assumption based on one or more technical indicators, they’ll check the volume level as well, informing their decision to trade. For instance, if an asset experiences a strong upward trend but the volume suddenly decreases, it’s likely that the trend will reverse and turn downward.
As mentioned, you can find the volume levels at the bottom of each chart. Watch for significant candles that might indicate something about the larger trend. For cumulative volume data, you can visit CoinMarketCap.
The MACD shows the relationship between two moving averages. Traders can use it to isolate trends. The movement of MACD acts like a trigger, signaling whether traders should buy or sell the coin in question.
In general, there are three types of movements observed using MACD: crossovers, divergence, and dramatic rise. Crossovers occur when the MACD rises or falls below the signal line, indicating a bullish or bearish pattern, respectively. A divergence between the MACD and the signal line means that the current momentum is about to reverse. Finally, a dramatic rise in MACD indicates that the asset is overbought.
In the following image, we can observe an example of MACD on the ETHBTC daily chart.
Traders use RSI to determine whether an asset is over or under bought. Its value ranges between 0 and 100. Above 70 indicates that the asset is overbought, while below 30 indicates that it is oversold. RSI is simply a comparison of gains and losses over a specified period of time.
The following chart shows the RSI for 14 days:
Bollinger Bands help determine volatile and stable conditions in the market. The bands are calculated through standard deviation, and those expand during volatile times and deflate under stable conditions. If the price of an asset approaches the higher band it is believed that it is overbought, and the converse holds true for the lower band; the asset is oversold.
Of course, technical analysis isn’t everything. For best results, savvy traders combine the relevant pieces from technical analysis with fundamental analysis for more holistic look at the market, helping them to make wiser investment decisions.
TradingView is a great free resource to start with. TradingView can easily display charts, add analysis such as trend lines and most other technical indicators.
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