The cryptocurrency market is highly volatile, which makes one need a strategy when trading. Trading can become a gamble when one engages in buy or sell orders based on intuition or guesswork. Therefore, many traders have utilized technical analysis to get information about what is happening in the market. There is a need to carry out several calculations to predict the price movement when trading.
So, what exactly is technical analysis? We explain to you and offer everything you need to know before you can start trading.
What is Technical Analysis?
The only possible way one can make use of technical analysis is by having an understanding of what it is. Technical analysis involves using mathematical indicators to evaluate statistical trends to predict price direction in the crypto market. Its essentiality lies in the attempts to understand the market sentiment behind price trends by focusing on trends and patterns instead of analyzing a security’s fundamental attributes.
Technical analysis appears as a trading discipline that traders use to evaluate investments and identify trading opportunities in price patterns and trends, mainly seen on charts. Technical analysis is based on the perspective that crypto’s future price relies on its past trading activity and price changes, which are vital indicators.
The Basics of Technical Analysis
Here is a look at what you need to know about technical analysis.
The Three Assumptions
Technical analysis is mainly based on three main assumptions, which we shall discuss in this section.
- The market discounts everything: This assumption is based on the perspective that everything in the market with the possibility of affecting crypto price is reflected in its price. The price indicates what anyone needs to know about any crypto asset. Thus, according to this perception, market pricing includes consideration of current, future, and past demand, regulations, the expectation of traders, trader knowledge, and so on.
- Price moves in a trend: According to the assumption, the price action always shows trends, regardless of the timeframe one uses. Price follows a trend; thus, future price movement is more likely to follow an established trend. Price trends can be categorized as moving upward, downward, or sideways to the right.
- History repeats itself: Technical analysts believe that indicators and patterns tend to repeat themselves. Therefore, the repetitive nature of the crypto market can help predict future market trends by analyzing previous patterns.
What can you use to conduct a technical analysis when trading cryptocurrencies? There are mainly six tools and indicators that you can use.
Six Basic Technical Analysis Tools and Indicators
1. Candlestick Charts
Charts represent a graphical presentation of price information of assets over time. Charts plot historical data based on price, volume, and time intervals.
Many traders prefer candlestick charts as they show more info on price movement. Every candlestick represents the activity around the time one chooses trade analysis. For instance, when one is working within a five-hour timeframe, every candlestick will be a representation of the price movement every five hours. Candlesticks mainly consist of a body and wicks. The body can either be green, showing an increase, or red, showing a decrease.
Green candlesticks show that a trade closed higher than its opening price. The red candlesticks show that the trade closed lower than the opening price. Additionally, wicks show the lowest and highest prices within the same period. Therefore, wicks are a representation of market volatility.
2. Support and Resistance
They are particular price levels that the market finds hard to exceed. A support price level is a point where prices stop moving lower, while resistance is the level where market prices cannot increase anymore. The support level is the bouncing spot for asset prices, in that, the instance market falls to that point, it picks up again, indicating a bullish reversal. On the other hand, once the prices rise to the resistance level, it drops back as it acts as an upper barrier, indicating bullish pressure.
3. Trend Lines
They mainly indicate potential market trends, which can take different forms. Besides, they can be used to draw out multiple trend lines to draw out more complex patterns. Trend lines usually connect different high and low-price points. The more the price point connects to the line, the stronger the trend.
4. Moving Average
It is an indicator that assists in the tracking of the price trend by taking the average of past prices of a crypto asset over a defined period. One can adjust the period to a suitable time frame to generate reliable signals in a real-time trading chart. A moving average helps traders have an insight into the market and quickly decide on a reasonable trade entry price.
5. Relative Strength Index (RSI)
The RSI is prevalent among veteran and novice traders alike. It is an indicator that shows itself as a simple line graph below a price chart. It oscillates at a range between 0 to 100, with 50 being neutral.
A higher value shows an asset is overbought, while a lower value indicates an oversold asset.
6. Bollinger Bands
It is mainly an indicator that can help one measure the price movement of an asset. It is mainly measured using a 20-day simple moving average by adding and subtracting a standard deviation from the moving average. It is overbought when the market price goes above the upper Bollinger band. On the other hand, when it is below the lower band, it is taken to be oversold.
Technical analysis can give traders an insight into the past of crypto, which assists in giving future predictions. However, technical analysis is not enough, and if one relies on it alone, they will not get any insight into sentiment or news, which are part of the elemental analysis. Never use an indicator in isolation or too many indicators at once when trading. Select a few that you think can help you in what you try to achieve.
Vincent Munene is a freelance writer and a great blockchain enthusiast. Blockchain has changed his life in terms of financial freedom and in return, he likes to educate people and keep them up to date on everything blockchain. He is a Biochemist by profession and also loves to play the piano.