Technical analysis in crypto trading

The high volatility crypto world is one of the most unpredictable markets. How do you know when to buy and sell when everything can change in an instant? Surprisingly, something as traditional as technical analysis works great, even for crypto assets. Once a trader understands technical analysis, concepts like Opening Range Breakout Strategy or Shark Pattern Trading Strategy will make sense and result in profits.

The background to technical analysis

Before this quick tour of the theory of technical analysis, it would be fair to recall the person who was at the root of it – Charles Dow. The founder of the Wall Street Journal laid out the assumptions on which modern technical analysis is based.

The price knows everything

The idea here is that price is the best source of information about an asset. Therefore, there is no need to delve deeply 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:

1. Primary trend – this can last for years whether it is a bullish or bearish market.
2. Secondary trend – also called corrections to a primary trend, this can contradict the main trend.
3. Tertiary trend – short-term trends that last no more than ten days and do not have a major effect on the main trend.

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 is important to learn about history. Although it is not a 100% effective tool, it is one of the most widely used methods for predicting prices.
Based on these assumptions, cryptographic analysis includes a set of tools and indicators that every trader can use. They have certain information about the asset and this is the basis for making a decision.

Candlestick diagram

The ancient Japanese rice measuring tool is now one of the most popular patterns among crypto traders. Traditionally, candlesticks are designated as green for rising prices and red for falling. Each of the candles has a body and a wick, shadow or tail.

It provides relevant information about the asset’s price movement. Whether it is a 15-minute time frame or a month, these candlesticks will provide a clear picture of the trading history.

Support and resistance

The support level is the line below which prices do not fall, and the resistance level is the line above which prices cannot rise.

These two levels are essential for reading charts and patterns. Based on these lines, a trader can predict how a price will move in the future.

Trend lines

Trendlines connect highs and lows in a price chart or candlestick wick – although they can only be based on closed candles. For traders, they act as markers of upcoming trends and indicate how strong they will be.

Moving average

This tool is useful 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 time frame.
• Exponential moving average – the latest prices without taking into account previous prices.

The most commonly used are the 10, 20, 30, 50, 100 and 200-day moving averages.

Relative Strength Index (RSI)

To decide whether to buy or sell, traders can 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 detect the entry and exit points.

Bollinger bands

Just like the previous tool, Bollinger Bands will determine price movements. These were developed by John Bollinger in the 1980s and help us 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. Then, 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 the ratio of the Fibonacci sequence and are almost impossible to miss in crypto trading, as every real-time chart has this tool.

Last thought

After some time in crypto trading, it becomes clear that technical analysis is a solid foundation for successful decisions. Of course, it does not provide simple predictions, but it provides 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. Despite the skeptical comments, technical analysis remains a must in crypto trading.