Crypto Technical Analysis: A Simple Guide for Beginners
As a newcomer to the world of cryptocurrency trading, you will need to have a good grasp of tools that can enhance your chances of success. Knowing how to read price charts using technical indicators will go a long way in enabling you to understand market sentiments.
That said, technical analysis is your best bet when it comes to monitoring the rise and fall of different cryptocurrencies. Moreover, with so much to lose or gain in the volatile crypto market, crypto technical analysis is a million-dollar skill you should learn!
In this post, we show you how to use crypto technical analysis tools to:
- Predict the direction of future prices.
- Confirm a particular trend.
- Also, finally, how to make the necessary arrangement to execute your trades.
However, first things first!
What Is Crypto Technical Analysis?
Technical analysis is an all-encompassing term used when one takes existing real-world data from the cryptocurrency market and plots it forward in an attempt to predict where it goes next. In the ideal scenario, crypto technical analysis enables you to predict when the market will next trend down (bearish) or trend up (bullish). If your prediction is correct, you will be able to buy on the dip (buying when the market is low) and sell when the market is high hence making a profit.
Since most crypto traders are looking to make quick profits, you will often notice natural corrections in prices over short periods that don’t unsettle the general trends seen in long periods. When the market is bullish for a considerable amount of time, demand will cause a reduction in the number of coins available for sale, and the prices will increase. An increase in price will prompt people to sell their currencies in an attempt to capitalise on the high prices. You can, therefore, expect the market to become bearish. As more people continue to sell, supply begins to outweigh demand, causing a reduction in the price.
These course corrections happen over a few days and sometimes in hours. Day traders watch such price movements to execute their trades. Investors targeting long-term wins will, however, consider more extended periods such as weeks, months, or even years, when analysing general upward and downward trends. This prevents them from selling their coins in a rush due to a downturn in price that might be just a natural correction after a long period of price rise.
Why do it?
Conducting crypto technical analysis enables you to read the market. It involves scrutinising charts and graphs from different angles and looking to find a consensus within that information to help you calculate where the market is going.
In the subsequent sections of this article, we discuss common types of technical indicators you are likely to come across in charts. We help you understand how they work and what you can read from them.
Types of Technical Indicators
Before we delve deeper, it is essential to note that you cannot be sure of what is going to happen in the future. Technical analysis uses the past to try and predict the future. However, in the cryptocurrency market, the whales (wealthy traders who buy and sell large volumes), the media, and governments can have a sudden and significant impact on price. Therefore, it is not possible to predict with 100% accuracy what will happen.
Instead of making an accurate prediction, technical analysis tools make you more prepared to go into the future days of trading.
One of the most confusing moments you are likely to have when you begin exploring price charts is the candlestick. Candlesticks are the rectangular shaped objects on a chart. They are either coloured green or red and have lines coming out of their bottom and topsides. They look pretty much like candlesticks hence the name.
So, what are candlesticks telling you?
The rectangular part of the candlestick is the difference between a coins opening and closing balance for the period you are searching. When the candlestick is green, the bottom side indicates the opening price, and the top of the rectangle shows the closing price. Green is a positive since it means that the coin increased in value during the day.
On the other hand, a reddish colour on the rectangle means that the coin decreased in value during that time. The opening price is at the top, and the closing price is at the bottom.
The lines coming out the rectangle from the top and bottom (wicks) show the highest and lowest range of prices for the day. This information is vital as it shows how volatile the cryptocurrency market is within 24 hours.
In a highly volatile market, your coin is more likely to either gain or lose in the next trading day. How? Because market volatility is an indication of whether the market is expanding down more than it is expanding up and vice versa. It also shows when the market is consolidating. This information is crucial as it can give you a clue as to whether a coin is likely to moon or crash.
Volume is another metric you will see when examining price graphs. There are two types of volume to consider; the literal volume of sales (the number of coins traded at the period you're observing) and the dollar volume.
The literal volume usually appears as a column along the bottom of a price chart. The height of the column represents the visual identifier of the volume, and the colour shows whether the volume was more bullish or bearish.
Volume is vital as it is an indicator of how serious a bearish or bullish market is. Large volumes of trade correspond to highly volatile prices. As a trader, volatility is significant as it enables you to buy at a low price and sell at a high price.
Examining candlestick and volume trends over short periods is an integral part of predicting price movements. However, you should not solely depend on these two indicators. Consider looking at the price movements across more prolonged periods (such as days, weeks, and months). This will ensure that you are not tricked by the market to buy or sell at the wrong time. This is where the moving average comes into play.
There are two types of moving average you are likely to come across: the simple moving average (SMA), and the exponential moving average (EMA).
The simple moving average shows the average closing price over a set period. If you are looking at a seven-day period, for example, the SMA value for any day in that week is equal to that day, plus the previous six days, divided by seven.
The SMA line moves up and down across the graph because a new closing price is added and an older closing price reduced every day. This is why it is called a moving average. The SMA indicates the trend overtime on a specific market by giving you a bird’s eye view of the market at a specified period.
The EMA is more complicated than SMA. For example, for a seven-day period, rather than treating the closing balance for each day equally and just adding them up and dividing by seven, the EMA graph evaluates each day differently based on its propinquity (closeness) to the current day. The day before is granted more importance than the other days with decreasing weight given to days as you go through the seven-day period. EMA is more reactionary and adapts quickly to volatility in the market.
The moving average helps you read the market by showing the support or resistance to buying or selling at a particular price point. When the market’s closing price for the day is below the moving average look for opportunities to short or sell. If the prices stay above the moving average, it suggests a bullish market, and as such, you should be seeking for an opportunity to buy.
The general rule when analysing moving averages is that the longer the period examined, the more reliable it is. As such, interpreting a day’s chart may not be enough; a more extended period of about thirty days is better.
What’s more, moving averages help you predict where the market has set buy and sell limits. The key here is to experiment with different moving average periods and compare them to candlesticks. If the candle wicks extend below or above the moving average, but the balance isn't passing the line, it indicates resistance (below the line) or support (above the line). As soon as the market goes beyond that point, smart contracts are activated to bring the price back.
If you are a day trader looking for hourly trades, the EMA will help you spot price fluctuations that you can ride on to make money. If, on the other hand, you are looking to trade for longer periods, SMA’s may serve you better as they don’t react to volatility.
You now have some of the essential basics of crypto technical analysis. While there are still other more advanced technical indicators you could learn, these will get you started in the cryptocurrency trading world.
Using the above tools, you can now:
- Identify the more significant market trends.
- Analyse volatility.
- Find key levels, so you know when you are right or wrong.
If you want to get started with crypto technical analysis, a handy website we love using is TradingView.
Give them a try and share your experience with us in the comment section below!
About the author:
Jay Jackson is a blockchain enthusiast and a freelance writer at topcryptowriter.com. He works closely with brands (people, businesses and startups) in the crypto sphere. He currently writes Blog posts, Guides, Press releases, ICO reviews, eBooks & Whitepapers. You can find him on LinkedIn.
Disclaimer: The above references an opinion and is for informational purposes only. Do not take this as personalised financial or investment advice. The opinions expressed by the author do not represent the opinion of BitPrime.
Last updated: 31/07/2019