Established cryptocurrencies behave according to specific patterns, making it easier to predict the market’s course for a short time. A technical analysis aids investors in finding the right spot to perform profitable trades.
In this article, you’ll read about the basics of technical analysis, the assumptions to follow, and the common indicators used to perform effective technical analysis.
Understanding Technical Analysis
Several mathematical indicators are used to predict the market’s future trajectory. Metrics like the volume data and previous price changes are evaluated to determine the market’s performance and predict future asset price fluctuations.
Assumptions Behind Technical Analysis
When conducting a technical analysis, recognizing these three tenets is crucial. Let’s read about each tenet for further clarification.
- The price always moves in a trend. If a cryptocurrency has established an up trend, it will most likely follow it until it reaches a threshold.
- The price of the cryptocurrency can reveal crucial information regarding future price movements.
- Crypto trends are sometimes repetitive, which means studying historical data and past trends can aid in predicting future market patterns.
Indicators Used in Techincal Analysis
Now that we have the basics covered, let’s read about the common indicators traders use for technical analysis.
Support and Resistance
These levels indicate the highest and lowest price levels of an asset. Traders constantly review these levels to make profitable moves. Investors and traders can identify the support and resistance levels on crypto charts.
The information gathered is then used to tweak the trading strategy. For example, a trader can put a stop loss at the support level and place sell orders at the resistance level. These levels are utilized in several ways to indicate future price trends or reversals.
Candlestick Charts
These charts are an essential analytical component of a crypto trader, as they provide more detail.
Instead of shrinking data and displaying one point at an interval, candlestick charts display four price levels for each interval. The high price, opening price, low price, and closing price are displayed on the chart.
On a candlestick chart, you’ll see a bar with one wick above and one below the bar. The top wick’s peak represents the high price on the chart, whereas the lower point of the bottom wick is the low price.
The bar will appear green or red, depending on the market stats. If it is green, it indicates an uptrend in the price, while a red bar means the price at the end of the day went down compared to the start of the day.
The top of the green bar shows the closing price, and the bottom represents the opening price (reversed for a red bar). Each surrounding data point is evaluated to understand further traders’ buying and selling patterns at a given time.
Relative Strength Index (RSI)
Whether you are a beginner or an expert trader, technical analysis is completed by evaluating the RSI. It’s an oscillatory indicator and is represented as a line graph.
The line fluctuates between a value of 0 to 100. If the value remains high, it indicates the cryptocurrency is being overbought, and if the oscillatory value becomes low, it points to oversold market conditions.
When used in conjunction with other indicators, RSI provides excellent results. Here’s an example for clarification.
Let’s say you have a currency and have evaluated the RSI, but it’s giving a low reading, i.e., 20, and at the same time, charts show the prices approaching the support level. The data from these indicators suggest the future cryptocurrency price has a high chance of increasing.
Cup and Handle Pattern
This pattern is drawn on a bullish price chart. The bottom half of a circle (cup) and a down-slanting line (handle) are drawn over the chart to determine price trends. However, this indicator is only used when a particular price fluctuation pattern is seen.
First, the price must fall, followed by a brief period of trading sideways, then a rise for the same time it took to fall, and then a brief price drop at the end.
When used on a bullish setup, it can confirm a price hike in the future, whereas, on a bearish market, the same pattern can be drawn, but it will be reversed and probably indicate a price fall.
Moving Average
The moving average indicator is used to discern the trend’s direction. The data points are summed up for a certain period and divided by the number of data points to get an average.
This average changes as the latest price data rolls in. Moving averages are either tracked on a short-term or long-term basis.
The long-term moving average is a more reliable indicator than the short-term, as more data is used, giving an accurate result. Several types of moving averages use varying time lengths and indicate the direction of the trend.
The golden cross is a popular moving average setup that occurs when the short-term MA exceeds the long-term MA.
Average Directional Index
The ADX is a short-term indicator that aids in determining the trend’s strength. The higher the average directional index, the more momentum the trend will gain.
This indicator shows the average value of directional movement lines over a specified time frame. Current low and high prices are used to calculate these lines.
Similar to the RSI, ADX has a value between 0 and 100 but seldom rises above 60. Most traders suggest that if the ADX value is above 25, it shows a strong trend, whereas a value below 20 indicates no trend. As the ADX value rises, so does the trend’s strength.
Trend Lines
This simple yet powerful indicator shows potential trends. These trend lines can take many forms and are drawn on charts to analyze market patterns. Trend lines connect several high and low-price points, providing a more straightforward approach to identifying trends.
Bollinger Bands
These indicators are placed above and below the moving average and indicate changes in volatility. When volatility expands, the bands contract and expand when the volatility decreases. The trading environment determines the price action.
When there’s a bullish market, trading in the direction of the price break out is most profitable, whereas in a bearish market, ignoring trade in the breakout’s direction will be profitable.
The idea behind the Bollinger Band indicator is that if an asset is experiencing high volatility levels, it will eventually change to low.
On-Balance Volume
It is an indicator that uses volume instead of price to measure the buying and selling pressure. The volume of an asset precedes its price.
When the volume on up days reaches more than on down days, the on-balance volume rises. In contrast, when the volume on down days becomes more than on up days, the OBV falls.
Conclusion
The technical analysis tools and indicators we shared here are standard ways to track price fluctuations. While there’s no definite methodology to conduct a technical analysis, using the indicators shared here can assist you in gaining an overview.
Along with using the mentioned indicators, don’t hesitate to read about other tools and technical analysis methodologies for the best results.
