Similar to the stock and forex market where technical analysis is heavily utilsed. Technical analysis is also one of the important tools used by cryptocurrency traders to have beetter understanding of the market sentiment.
However, compared to these traditional markets, the cryptocurrency market contains a large number of traders who don’t have a prior knowledge of this approach.
Understanding the concept behind candlesticks chart ( technical analysis) as seen on cryptocurrency exchanges can be a daunting process especially for many enthusiasts who are into crypto trading
This guide attempt to explain the concept of technical analysis and how it can be used in the cryptocurrency market.
What is Technical Analysis
Technical analysis involves the use of past market data such as price history, volume as well as other technical Indicators to analyse the price of a coin.
The concept of technical analysis can be further explained using Charles Dow theory, the man who first introduced technical analysis.
Understanding Dow’s theory is crucial as it gives us a better idea of what technical analysis based on.
With regards to the cryptocurrency market, Dow’s theory can be based on these three assumptions.
1. The Market Moves in Trends
The market of a crypto coin has three major trends; the long or the main trend, which can last for years, followed by the medium or intermediate trend which can last up to three months before retracement and the short trend which can last up to a month.
Each of these trends has three phases; the accumulation phase, public phase and distribution phase. And they can either be bullish (upward movement) or bearish (downward movement) or move in sideways. These simply means the price movement of these coins don’t occur randomly but follow these definite trends.
2. Market Considers And Incorporate Everything In Its Pricing
The market considers and incorporates all existing and prior details into its pricing. This could be information, news, partnership deals amongst others, all of these details influence the price of a cryptocurrency. Therefore they reflect into its pricing, as soon as they become available.
3. History Repeats Itself
In technical analysis, mass psychology can be predicted as history tends to repeat itself when traders are presented with a similar opportunity as before.
Technical indicators are tools used in technical analysis to forecast the future price of a coin.
With regards to crypto, some of these indicators can be used to locate a current trend, support and resistance zone, trend reversal. These are some of the technical indicators frequently used by crypto traders in the market.
Support And Resistance Level
These are one of the basic components of technical analysis. Support and resistance are horizontal levels when identified can give the trader a better view of the demand and supply of a coin. The support level is the price that based on past market data, a coin has had difficulty falling below. The support level simply gives traders an idea that there’s an increased demand at that level which has stopped the market from falling.
Likewise, the resistance level is the price that historically, the price of a coin has had difficulty moving above. Resistance level is the exact opposite of support and it simply shows supply has exceeded demand.
However, it’s important to note that a breakout may occur to any of these levels. For example when the price of coin breakthrough, the resistance level, turns to be the new support level.
Trendlines, as the name suggests, are lines that give traders a better view of the current trend of a coin. The price chart of a coin is often characterized by a series of upward and downward movement. In a market like crypto which is frequently subject to extreme volatility, identifying and isolating this trends can prove difficult. However using trendlines, traders can be able to spot an uptrend when there is a series of higher highs and higher low. Or a downtrend when the is a series of lower highs and lower lows.
Also, a trend can move in horizontal in this case there’s no clear pattern and the price of a coin is neither upward nor downward but moves in channels. Furthermore, it is important to note that a trend can change, however, change in trend is often based on the market sentiment.
The trading volume of a coin is one of the technical indicators you should give rapt attention. Trends are confirmed by volume. Trading volume tells you how strong or weak a trend is. The volume that accompanies a price trend could have a different meaning. For example, a price movement that is accompanied by high volume clearly reflect a true market with active traders.
The price chart of a coin contains candlesticks of two colour. The green candlestick simply means the closing price is higher than the opening price and it represents a positive price movement. The red candlestick represents a negative price movement and it shows the closing price is lower than the opening price. Each of the candlesticks represents a timeframe which can range from minutes, hours, days and even month.
Understanding how to read the candlestick chart is crucial as it is the basis upon which other technical indicators can be determined.
Yet another technical indicator that can be very essential in determining the direction of a chart. A moving average sum up the average price of a coin over a period of time. The period of a moving average can range from 20, 50, 100, 200. There are many moving averages, but the exponential moving average (EMA) is preferred by many as it gives a better average value compared to other moving averages.
Moving averages when utilised can help located trend reversal, and major support and resistance level.
It is important to note that, understanding technical analysis (TA) comes with constant practice, mastering all of these indicators, and when put together can be used to develop a profitable trading strategy. TradingView a resource website that can get you started, it’s a platform that provides charting options to traders, and you can as well follow other traders on the platform.
With technical analysis, traders can be able to understand the general price sentiment of a coin and make risk-effective trading decisions.
Additionally, it is important to note that the cryptocurrency market is frequently subjected to regulations, ETFs speculations, amongst other. All of these fundamentals are crucial to the crypto market and cannot be ignored. Due to this reason, it’s is wiser to mix both technical analysis and the fundamentals before making any trading decision. In fact, this is the approach employed by many crypto traders, they use the fundamentals to buy a coin and rely on technical analysis to locate entry and exit point during trading.