The high-volatility crypto world is one of the most unpredictable markets. How do you know when to buy and sell if everything can change in an instant? Surprisingly, something as traditional as technical analysis works great, even for crypto assets. As soon as a trader understands technical analysis, concepts such as Opening Range Breakout Strategy or Shark Pattern Trading Strategy will make sense and result in profits.
The Background of Technical Analysis
Before this quick tour into the theory of technical analysis, it would be fair to remember the person who was at the root of it – Charles Dow. The founder of the Wall Street Journal worked out the assumptions on which modern technical analysis relies.
The Price Knows It All
The idea here is that price is the best source of information about an asset. Therefore, there’s no need to dive deep into subfactors. If the price is up, then that’s exactly what you need to know – as this will be a natural market reaction to an asset’s increasing value.
There Are 3 Possible Market Directions
According to this assumption, we have three trends:
- Primary Trend – this can last for years, whether it’s a bullish or bearish market.
- Secondary Trend – also called corrections to a primary trend, this may contradict the main trend.
- Tertiary Trend – short-lived trends that don’t last more than ten days and don’t have much of an effect on the main tendency.
History Is a Spiral
This assumption justifies charts and patterns – as they are all representations of past events. So, to get a prediction that is close to reality, it’s essential to learn about history. Though it’s not a 100% effective tool, it is one of the most widely used methods of predicting prices.
Based on these assumptions, crypto tech analysis includes a set of tools and indicators that every trader can use. They hold certain information about the asset, and this is the base for making a decision.
Candlestick Chart
The old Japanese rice measurement tool is now one of the most popular patterns among crypto traders. Traditionally, candlesticks are denoted as green for increasing prices and red for decreasing. Each of the candles has a body and a wick, shadow, or tail.
It provides relevant information about the asset’s price movement. Whether there’s a time frame of 15 minutes or one month, those candlesticks will give a clear picture of the trading history.
Support and Resistance
The support level is the line under which prices do not drop, and the resistance level is the line above which prices can’t go up.
These two levels are crucial in reading charts and patterns. Based on these lines, a trader can predict how a price will move in the future.
Trend Lines
Trend lines connect the highs and lows of a price chart or candle wicks – though they can only be based on closed candles. For traders, they serve as marks of upcoming trends and indicate how strong they will be.
Moving Average
This tool is helpful when a trader wants to evaluate a price trend for a certain period or generate trading signals. As a rule, there are two types of moving averages:
- The simple moving average – the average of total prices in a specified timeframe.
- Exponential moving average – the most recent prices without taking into account past prices.
The most widely used are the 10,20, 30,50, 100, and 200-day moving averages.
Relative Strength Index (RSI)
To determine whether to buy or sell, traders may sometimes use the Relative Strength Index – an oscillator that shows the value of an asset – if it is overbought or oversold. It also helps to spot the entry and exit points.
Bollinger Bands
Just like the previous tool, Bollinger Bands will determine price movements. Developed by John Bollinger in the 1980s, these help us to understand market trends. There are three types of bands – those for the upper level, the lower level, and the moving average. If the market price is above the upper level, it is an overbought sign. Subsequently, if it is below the lower level, it is oversold.
Fibonacci Retracement
Fibonacci retracement is a crucial tool in crypto that shows the price at which a stock or cryptocurrency tends to see a reversal in a trend. Fibonacci retracement levels are based on ratios of the Fibonacci sequence, and it is almost impossible to miss in crypto trading, as every real-time chart has this tool.
Final Thought
After some time in crypto trading, it becomes clear that technical analysis is a solid foundation for successful decisions. Of course, it doesn’t provide straightforward predictions, but it gives accurate information about trends and past events. Further actions depend on the trader’s experience and strategy. The more tools there are, the better the results will be. Even so, despite the skeptical comments, technical analysis remains a must-have in crypto trading.