Technical analysis is a key tool in the arsenal of many cryptocurrency traders, helping them understand the ebb and flow of the market.

But technical analysis is not deterministic. It does not tell you what will definitely happen, but rather what will happen. likely occur given the historical information analyzed through the study of graphs. However, to be effective, it has to be done precisely, which is a bit tricky.

Whether trading or investing, cryptocurrencies carry enormous risks and opportunities, due to their extreme volatility, so it is recommended to proceed with caution.

What is technical analysis?

Technical analysis is the study of price movements through the use of charts. Traders use TA to profit from price changes, even when a cryptocurrency goes down.

main assumptions for technical assistance include the following:

• All information is reflected in the price.
• Human psychology tends to repeat itself over time.
• Statistical analysis can help you figure out what the price might do next

TA is not for everyone.

Although some think that major cryptocurrencies like Bitcoin can go to zero, many in cryptocurrencies think that the ‘secular trend’, similar to the ‘long-term direction’, of major currencies like Bitcoin is upward. For this reason and others such as taxes, they prefer to invest for the long term and only HODL. For HODLing, of course, no technical assistance is needed.

What are candlestick charts?

On February 23, 2021, Decrypt reported that “Yesterday, crypto analysts were admiring (if you can call it that) the Bitcoin newspaper red candle wick —That’s the low reached before the trend reversed for the day. But today the market is facing the biggest red-bodied candle in the history of Bitcoin.

Concepts such as the body of the candle, the wick and the colors are fundamental to TA.

A candle on a chart contains the following:

• Weather: 1 minute, 5 hours, 1 day, 1 week… depends on the time frame you are plotting
• Opening and closing prices at the beginning and end of this time interval, contained in the candles. body
• price of the highest and lowest point reached during the time period is reflected in fine lines that protrude from the body (but are not part of it) called wicks.
• Color: Red (price has dropped) and green (price has gone up) or any other preferred color combination

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This is what the Bitcoin candles look like on a simple hourly chart on August 31, 2021:

png »alt =» Bitcoin hourly chart »style =» max-width: 100%; overflow: hidden; width: 100% »/> A Bitcoin hourly chart.

Many traders see the color changes (price direction) in the candles as a battle between sellers and buyers, or bearish and bullish.

It is important not to confuse a wick with the full body of a candle holder. body contains information about the opening and closing prices in that time period and the wicks represent unsuccessful attempts.

In the chart above, you can see the failed attempts represented by the wicks at 5pm and 6pm (UK time) on August 31, 2021: Bitcoin has almost dropped near the lows of $ 47,000, but has returned every time. And at 8pm, you can see that the bearish attempt is successful, but this time a new attempt to take it below $ 47,000 is rejected … at least for that one hour period.

example here uses an hourly chart. But charts with a shorter time frame tend to be more volatile and contain less useful information than a chart with a longer time frame. Traders using TA tend to combine different time frames to make sense of the big picture.

Did you know

Like most TA concepts and tools, candles do not come from the cryptocurrency market. Candlesticks were first used in the rice derivatives trade of feudal Japan in the 18th century!

What are the support and resistance levels?

In February 2020, deciphering the wrote, “[Bitcoin] fell to $ 8,979 before recovering slightly above the price of $ 9,000. But the psychological level of support may not last long.

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And when Bitcoin topped $ 15,000 in November 2020, market analysts said decrypting Bitcoin broke through a resistance level . «

A support level is a price point where many buyers are expected to intervene; conversely, a resistance level is where many tend to sell. When a cryptocurrency breaks a resistance level, it means that a price that many people were previously selling at no longer see as an attractive price to sell. Technical analysts can judge a previous resistance level as the new support level if the price is expected to increase each time it reaches that level.

Support and resistance levels are often highly rounded price points in USD terms, such as $ 15,000 or $ 65,000. A price like $ 17,484 is too psychologically random to become a support or resistance level.

What do traders do with support and resistance levels?

Traders make key decisions at support and resistance levels. If they believe that the cryptocurrency will rally at a price, they will ‘enter’ that support level – they will buy that particular cryptocurrency. And when the price reaches what they believe to be the resistance level, they will “break out” or sell that cryptocurrency.

Traders with a high appetite for risk can choose leveraged trading, which is a way of betting on prices and amplifying profits (or losses). Some exchanges allow traders to open ‘long’ and ‘short’ positions with leverage, meaning that you are betting on the price of a cryptocurrency going up or down with borrowed funds. Desire is bullish, for example. a trader expects the price to rise and is willing to put up his funds as collateral. short circuit is the opposite.

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Leveraged trading can be extremely risky; traders can win or lose two, five or even 100 times more than they would with normal market orders. Many cryptocurrency exchanges have recently started to remove such high leverage.

Identification of support and resistance levels

TA uses many different tools and techniques to identify support and resistance levels and traders sometimes differ in their conclusions depending on how they use these tools.

One of the most common techniques is Fibonacci Retracement .

$ BTC US dollar

If I could only have one tool to use in a bull market, it would be the Fibonacci levels. A weekly close above $ 17,200 will be extremely bullish.

bulls start to show strength, the bears sweat. pic.twitter.com/m0rngUlheV

– Koroush AK (@Koroush AK) November 28, 2020

You may vaguely recall the concept of “Fibonacci numbers” from high school math class. y are numbers in a sequence 1,618 times the previous number. It is useful to calculate how many rabbits can reproduce in perfect conditions.

It is also useful for cryptocurrency traders because it allows you to take extreme points (the highest and lowest price in a given period of time) and divide the distance between the Fibonacci indices of 23.6%, 38.2%, 50%, 61.8% and 100%. to help identify potential support and resistance levels. It may sound complicated, but popular TA platforms like TradingView allow you to track Fibonacci retracements with just a couple of clicks.

But support and resistance levels alone do not provide enough information for traders, so they will turn to other complementary techniques.

Bollinger Bands are a popular companion tool. It allows you to draw three lines: normally a 20-day simple moving average (the direction of the price in that period), an upper band , and a lower band . Traders observe these bands to gauge the strength of a trend and decide the best time to enter the market.

If a cryptocurrency is above the upper band, it is considered overbought and traders will steer clear of it. If it is below the lower band, then it is considered to be selling less, which makes it an interesting trade to enter.

To draw these lines, Bollinger Bands uses another basic concept of mathematics, the standard deviation, to determine where the upper and lower bands are. more volatile the market, the greater the distance between the bands.

$ BTC

Falling short here… ..

Bad price action with volatility and Bollinger bandwidth extremely low… I was expecting a very big move soon. My bet is a downward move. pic.twitter.com/q4NYwKvWXf

– Altcoin Psycho (@AltcoinPsycho) September 25, 2018

Bollinger bands also help traders understand where price can go after support and resistance reversals.

Reversals are bullish or bearish price changes and are often recurring patterns. Traders try to identify these carals with sometimes funny names like “a cup and a handle.”

Fundamental analysis vs technical analysis

Fundamental analysis (FA) is another widely used technique for measuring the value of cryptocurrencies.

FA examines the ‘fundamentals’ that support or undermine a cryptocurrency: the technical unsurts of the underlying blockchain, the problems the blockchain project seeks to solve, potential issues related to legality, the team behind it, the white paper and the roadmap.

In traditional markets, much of the information about companies is not public or is reported only on a quarterly basis. In cryptocurrencies, it is possible to evaluate projects based on on-chain metrics in real time, which can include hash rates, transaction volumes, property distribution between wallets and their movements.

Investors tend to use FA when they decide to invest money in a project over a relatively long period of time, assuming that the markets will reward robust projects.

Limits of technical analysis

While FA and TA are not mutually exclusive and technical analysts tend to think that fundamentals are already reflected in cryptocurrency prices (a lot of debate), there are unavoidable limitations.

Fundamental analysts think that the price does not always reflect the true fundamentals, if, for example, not everything related to a project is widely known to traders. And as that information becomes more widely known, it could affect the price.

But both inevitably suffer from limitations, such as abrupt and unexpected regulatory moves targeting cryptocurrencies; the industry often labels them as FUD (fear, uncertainty and doubt).

Some argue that TA is perhaps a self-fulfilling collective prophecy. When traders make predictions and act accordingly, the price reflects those changes, confirming what they thought would happen in the first place.

And when techniques are misused or unpredictable factors dominate the market significantly, technical assistance becomes anything but useful.

Even those who are AT experts can get the analysis wrong. In 2019, the Bitcoin price report from CNBC’s main news site became a running gag – when mapped to a TradingView chart 95% of the time, the opposite happened to what business analysts told CNBC.

So again DYOR and trade with caution!

Disclaimer

views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment or other advice.

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