The crypto market ebbs and flows, and seasoned traders believe that using Technical Analysis (TA) to capitalise on those patterns can lead to success. But, Technical Analysis is hard and learning to do it successfully takes a lot of time and patience. Let’s go through some of the basics.
What is Technical Analysis?
Technical analysts believe that human psychology is what drives markets. Human emotions like fear and greed follow surprisingly common patterns and with the right analysis and use of candlestick charts they can often be predicted.
TA has proven to be a powerful trading tool but there are other factors you need to keep in mind when developing a trading strategy like tokenomics, network activity, use-case, development team, notable partnerships, and other macro-indicators.
Fundamental vs Technical Analysis
Fundamental Analysis (FA) is an objective measure of an asset’s value. Unlike FA, TA focuses almost exclusively on price action. Technical analysts believe pumps and dumps are ultimately caused by the irrational emotions of those holding the assets. It’s important to learn how to perform both TA and FA.
Candlesticks
Almost everything in TA involves the candlestick chart. But what is it and what does it show?
Each candlestick shows a snapshot of the trading activity within a given unit of time. For example, if you have the chart set to 1 hour, each candle will represent one hour of trading activity. A green candle means prices went up during that period, and a red candle means prices went down.
Almost all candles will have a ‘body’ and a ‘wick.’ The body is the thicker part of the candle. The wicks are the thinner parts sticking out from the top or bottom of the body.
A candle with almost no body means that almost all of the trading during the time period took place during a very narrow price range. This means that the price did not change much during that time. When you see a candle that’s almost all body with no wicks, that means that price either moved to the upside or the downside during that period.
Wicks on a candle denote the highest and lowest prices during that trading period. Wicks are incredibly useful as they can tell us when traders are taking profits or buying the dip.
A long wick on the bottom of the candle suggests that traders are buying the dip, meaning that the price could still be bullish. A long wick at the top suggests that traders are itching to take profits.
However, it’s only when you factor in trading volumes that you can start making price predictions with candlestick charts.
Trading Volumes
Factoring in trading volumes is essential for good technical analysis. Each volume bar you see at the bottom of a trading window shows you the amount of an asset that was traded during the time period you set.
As a general rule, you want to be trading on a market that has lots of volume. Low volume tends to lead to price volatility, meaning that price could suddenly spike up or down.
Patterns
When traders draw lines on candlestick charts, they’re usually looking for 3 things.
1. Support: refers to the lower limit of where the price of an asset could go
2. Resistance: refers to the upper limit
3. Recognisable price patterns
There are many ways to assess where the support and resistance prices could be and more often than not they reveal recognisable price patterns.
More indicators
There are hundreds of different indicators are used in technical analysis trading. Here are some common indicators:
- Moving Averages: determine the average price of an asset over a given period of time
- MACD (moving average convergence divergence): used to determine new trends in price and measure price volatility
- RSI (Relative Strength Index): tells you if a cryptocurrency is over- or under-valued
- Bollinger Bands: Like MACD, Bollinger Bands are used to measure market volatility
Disclaimer: NOT FINANCIAL NOR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.