Crypto traders have several tools to assess the cryptocurrency market. One of them is an approach known as Technical Analysis. Using this method, traders can get a better understanding of the market sentiment and isolate significant trends in the market. This data can be used to make more educated predictions and wiser trades.
Tech analysis considers the history of a coin with price charts and trading volumes, no matter what the coin or project does. As opposed to technical analysis, fundamental analysis is more focused on establishing if a coin is over or under valued.
Below we review some of the most reliable methods for technical analysis. For anyone wanting a more comprehensive guide to technical analysis, go straight to the source: Technical Analysis of Stock Trends by Edwards and Magee. It’s the basis of all modern technical analysis books and highly recommended (although not a light read).
Trend lines, or the typical direction that a coin is moving towards, can be most beneficial for traders of crypto. That said, isolating these trends can be easier said than done. Crypto assets might be substantially volatile, and watching a Bitcoin or crypto price movement chart will probably reveal a selection of highs and lows that form a linear pattern. With that in mind, Technicians understand that they can overlook the volatility and find an upward trend upon seeing a series of higher highs, and vice versa – they can identify a downtrend when they see a series of lower lows.
Additionally, there are trends that move sideways, and in these cases, a coin doesn’t move significantly in either direction. Traders should be mindful that trends come in many forms, including intermediate, long and short term trend lines. Trendlines have appeared across many cryptocurrencies in recent chart history and can be a valid method of trading provided done correctly. Experienced traders will keep an eye out for false break outs and place stops in appropriate positions.
Resistance and support levels
As there are trend lines, there are also horizontal lines that express levels of support and resistance. By identifying the values of these levels, we can draw conclusions about the current supply and demand of the coin. At a support level, there seems to be a considerable amount of traders who are willing to buy the coin (a large demand), i.e., those traders believe that the currency is priced low at this level and therefore will seek to buy it at that price. Once the coin reaches close to that level, a “floor” of buyers is created. The large demand usually stops the decline and sometimes even changes the momentum to an upward trend. A level of resistance is exactly the opposite – an area where many sellers wait patiently with their orders, forming a large supply zone. Every time the coin approaches that “ceiling”, it encounters the supply stacks and goes back.
There is often a situation in which trade-offs can be between support and resistance levels: gathering close to support lines and selling around the resistance level. This opportunity usually takes place when lateral movement is identified.
So what happens during breakout of resistance or support level? There is high probability that this is an indicator which is strengthening the existing trend. Further reinforcement of the trend is obtained when the resistance level becomes support level, and being tested from above shortly after the breakout.
Note: False breakouts occur when a breakout happens, but the trend doesn’t change. Hence, we must use some more indicators, such as trading volume, to identify the trend.
Another technical analysis tool for crypto currencies and technical analysis in general, in order to simplify trend recognition, is called moving averages (MA). A moving average is based on the average price of the coin over a certain period of time. For example, a moving average of a given day will be calculated according to the price of the coin for each of the 20 trading days prior to that day. Connecting all moving averages forms a line.
It is also important to recognize the exponential moving average (EMA), a moving average that gives more weight in its calculation to the price values of the last few days than the previous days.
Moving averages are useful in identifying the trend of a cryptocurrency. Traders can also use two moving averages on the same chart to identify “moving average cross over” trade opportunities. This is where a faster moving average over takes a slower moving average. A buy trade would, for example, be where a 10 MA rises above a 20 MA. By contrast, a sell trade would be when a 50 MA cross below a 100 MA.
The below image is an example of how a faster moving average (red line) crosses over a slower moving average (blue line) to create trade opportunities.
There are different groups of chart patterns: bullish patterns indicate the likeliness of an ongoing uptrend. Bearish patterns signal that the price is relatively likely to move further downwards. The third group are the reversal patterns: Those few well known chart patterns often signal that the predominant trend is ending and you can expect a price breakout in the opposite direction.
Although those patterns are absolutely no guarantee for a certain market behaviour, it is still fact that the likelihood for the expected market move is significantly higher than another behaviour.
The below images shows some of the most common chart patterns traders will encounter: