Technical Analysis for Cryptocurrency Trading: All You Need to Know

Hey there, my fellow crypto enthusiasts! Being a self-proclaimed nerd and a keen follower of the trends, I’m once again thrilled to share what I’ve learned about technical analysis for cryptocurrency trading. Irrespective of you being a seasoned crypto-trader or just a newbie in crypto trading, I hope this guide is going to give you what you need. So, go through it to maximise profits. So, let's dive right in!

What is Technical Analysis of Cryptocurrencies?

Crypto technical analysis is a method of scrutinising financial and crypto markets. It is done by studying historical pricing and volume numbers. The goal is to identify patterns in the data. And these patterns can be put to use to predict what lies in future, i.e., price movements. For this, we use some tools and some already proven techniques to analyse. Data could be market metrics, including, but not limited to charts, indicators, and mathematical models.

Cryptocurrency Investing

Before we deep dive into technical analysis, let's talk about cryptocurrency investing first. As you all know, these are digital assets that deploy cryptography to secure and verify transactions. Often, these are pitted as decentralised and operating independently from the “evil” clutches of governments and financial regulatory institutions. Over the years, many investors have made big profits by investing in cryptocurrencies. In fact, some early Bitcoin adopters have become millionaires. Although, the crypto market has seen a lot of volatility. Still it hasn’t stopped investors from making big gains. Cryptocurrencies can be bought and sold on cryptocurrency exchanges, which operate akin to the regular stock exchanges. We observe that the prices can, sometimes be enormously unpredictable and like regular stocks and shares, could be affected by many factors, such as news, events, and market sentiment.

Candlestick Charts

One of most used tools in crypto technical analysis are Candlestick Charts. Not only these charts can help you visualise the price movements, but also provide valuable deep insights.

For instance, certain patterns indicate changes in the momentum of price. These patterns are called candlestick formations. They can be both bullish or bearish. They can signal the start of a new trend or an old trend’s reversal. By using these, traders can also visually identify support level and resistance. Support levels means the price where cryptocurrency will find buying support, while resistance levels are the prices at which a cryptocurrency will face selling pressure. Identification of these levels help traders make informed decisions regarding when to enter or exit.

Moving Averages

Moving averages is another popular tool to identify trends, support, and resistance levels. It is calculated by averaging the price of a cryptocurrency over a certain duration. Short-term moving averages help in identifying short-term trends; and similarly, long-term moving averages help recognise long-term trends.

Relative Strength Index (RSI)

Relative Strength Index (RSI) is another popular tool that measures how strong a trend is. It provides a scale from 0 to 100. If the RSI is above 70, it simply means that the price has gone up a lot. So, it being too high, is an indication of the time to sell it. Similarly, when RSI is below 30, it tells that the price has plunged down. Hence, the indication is, time is ripe to buy it.

Fibonacci Retracements

Fibonacci Retracements is another very prevalent tool used in the identification of support and resistance levels. As the name suggests it is based on the Fibonacci sequence, that is, a succession of numbers where every next number is the sum of the two previous numbers. The retracement levels are computed by inputting the highest and lowest points of the asset's price movement. These are then divided by the vertical distance from the key Fibonacci ratios: 23.6%, 38.2%, 50%, 61.8%, and 100%. So, the retracement levels indicate areas of support or resistance, where prices may jump up or down.

Bollinger Bands and MACD (Moving Average Convergence Divergence)

Bollinger Bands identify potential price breakouts and measure volatility. Bollinger bands comprise three distinct lines: a lower band, an upper band, and a moving average. Upper and lower bands are calculated on the basis of asset's volatility, while the moving averages are used to identify the trend. Similarly, MACD is an oscillator that calculates the alteration among two moving averages. It identifies trend reversals’ potential and is sometimes used to verify the strength of trend.

Different Trading Strategies

There are many different trading strategies that make use of technical analysis. One of the trading strategies which is very popular is trend following. Trends are identified through moving averages and other such tools. Based on trends, buying and selling decisions are made. Then, there is breakout trading, where buying or selling decisions are based on asset breaks through a support or resistance level.

Trading Signals

Trading signals can be described as warnings, which tell you about the right moment to buy or sell cryptocurrency. People make use of different tools and methods, like some of those mentioned above, to create these signals. For example, such as looking at charts or using mathematical formulations. Some of these are easy to grasp, while some could be more complicated and may require additional in-depth study to figure out their inherent meaning. Fundamentally, these trading signals help in making smart decisions about buying and selling, so that they make more money.

Bottom Line

By the thorough understanding of the tools and techniques of cryptocurrency technical analysis, you can identify trends, support, and resistance levels, and potential price breakouts. For finding the best opportunities in the cryptocurrency trade, you must read cryptocurrency charts, historical price, and volume data; as technical analysis is really helpful to identify where the market is moving. Only then you’d be able to make informed decisions. But never forget, however, that no analysis or strategy can 100% guarantee profits in cryptocurrency trading, or in any other asset trading. Hence, it is always sensible to manage your risks judiciously.

References

1. Bitcoin Technical Analysis for Beginners https://www.moneycontrol.com/msite/wazirx-cryptocontrol-articles/bitcoin-technical-analysis-for-beginners/

2. Crypto charts 101: How to read cryptocurrency charts
   https://cointelegraph.com/learn/crypto-charts-101-how-to-read-cryptocurrency-charts/

3. A Beginner’s Guide To Crypto Technical Analysis
   https://zebpay.com/in/blog/guide-to-crypto-technical-analysis/