One of the best tools for crypto trading out there is Technical Analysis (TA). Perhaps you have already encountered it in videos about trading, whether crypto or stocks, as day traders widely use it. Also, many educational resources about crypto trading use it as an introductory subject. TA is very intuitive to understand, and it's great for those entering the trading market for the first time.
It is also essential to understand that Technical Analysis is just a tool. There is no magic silver bullet to beat the crypto market or a perfect prediction system. It will always be just another tool anyone can learn how to use. TA will only work if you use it consistently and with discipline. Otherwise, it will be as worthless as paying a fortune teller.
What is Technical Analysis?
Technical Analysis is a method to predict the possible future price movements of an asset. Any asset, stocks, bonds, cryptocurrencies, etc., as long as the price can be charted on two axes, TA can be used. TA began many centuries ago in Japan, where it was first introduced. It was used on the rice commodity market, which still exists today, and it is the oldest continuously running commodity market on the planet.
The theory behind Technical Analysis states that price charts reflect the collective will and sentiment by all market participants. Both action and emotion are shown in the battle of buying and selling. By identifying patterns when one side dominates the other, an analyst can predict when these may repeat in the future.
It is at the core of Technical Analysis that past performance can be used to predict future outcomes. As such, traders using TA focus a lot on price movements across different periods. It's what differentiates TA from Fundamental Analysis or Algorithmic Trading.
Technical Analysis and time frames
One of the basic concepts behind Technical Analysis and its use for crypto trading is time frames. Understanding how to interpret the data using various time horizons is what gives TA its usefulness. Come of the famous time intervals used in TA are:
- 5-minute chart
- 15-minute chart
- Hourly chart
- 4-hour chart
- Daily chart\ Sometimes monthly and even yearly charts are used when doing TA for trading crypto. The time frame used is -most times- dictated by the volatility of the asset. In crypto trading, most analysts use short intervals because crypto coins and tokens are very volatile. Also, crypto assets, unlike stocks, are very young. Most have a couple of years at most in the market. So, using long periods in price charts is not very useful.
Another important factor when choosing a time frame is how long a trader plans to hold the asset.
For example, in crypto trading, most will swap a token multiple times during the day. In these cases, charts from the hour down are the most useful. Now, most people hold crypto coins for long periods. So, daily and monthly charts will be the most important for these cases.
Candlesticks
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Another fundamental part of TA for crypto trading is candlesticks. They are what is most used when plotting a price chart of any tradable asset. A candlestick is the representation of a single time frame on the cart. For example, each candlestick represents one hour in an hourly chart, so looking at an hourly chart for a trading day should have 24 candlesticks.
Candlesticks have the following characteristics. They always come in two colors for representing positive growth in the price or a drop, usually green and red. The highest point in a candlestick represents the highest price the asset was sold during that time frame, and the bottom lowest part shows the opposite.
The body of the candlestick shows the opening and closing price for each period. Again, green means that the opening price was higher than before, while red the opposite. Candlesticks will not be symmetrical all the time. Most times, a candlestick can show a tendency by its shape. But below, we offer a standard candlestick with its components.
Candlesticks shapes
In crypto trading , candlesticks will take different shapes according to market sentiment. A positive candlestick with no long bits at both ends signals a very bullish market, while its counterpart shows the other side. The more the body shrinks, and the longer the sticks become, the more the market transitions from bullish to bearish.
Any person doing crypto trading needs to keep close track of the shapes of the candlesticks. Here it is essential to combine time frames and candlesticks. A short period will show more volatility, and the volatility will be counteracted by longer ones. So, a trader needs to combine more than one price chart to track how the small rapid movements in the short term translate to the medium to long term.
Candlesticks won't show on a real trading cession as neatly as in the graphic above. There will be significant differences, and here a person has to exercise judgment when crypto trading. Of course, trying to see these patterns using eyes alone is extremely hard and unreliable. Next, we introduce the final piece of the puzzle.
Indicators
Indicators are what make Technical Analysis well technical. In crypto trading, hands are a set of tools projected on the price chart to identify patterns better. There are hundreds of indicators in the world of crypto trading. Traders with enough experience create their own hands based on what has served them well in the past. We will show the most common ones in this section.
Moving averages
At the top of the list, we have moving averages. A moving average is an average taken of a sample that has been subdivided into equally proportioned subsets. For example, 24 hours moving average of Bitcoin will take the average price of BTC at each hour of a day. Then, add all of the 24 standards and divide them by 24 hours.\
This calculation will show up as a line projected over the price chart. As the price moves, the line will change accordingly with the overall behavior of the asset. In crypto trading, most traders begin their TA with the moving average and try more advanced techniques.
Above, we see a simple moving average on a daily price chart for BTC. The blue line is the projected moving average at the same time, which follows the price of Bitcoin over the period. There are more complex moving averages in crypto trading. Some of them are exponential moving averages, weighted moving averages, RSI moving averages, etc.
Fibonacci Retracements
Another widely used indicator is the Fibonacci Retracement. Fibonacci was a 13th-century mathematician that identified specific ratios that continuously repeat in nature. In Technical Analysis, these ratios are used to breakdown entry points in a price chart. An analyst will take a low moment and a peak and divide them by 23.6%, 38.2%, 50%, 61.8%, and 100%. A shown above.
Each horizontal line corresponds to a Fibonacci ratio and identifies support and resistance levels. A support level is a minimum price that the market has difficulty breaking down.
Simultaneously, a resistance level is the opposite, an upper-level sealing for an asset's price.\
These ratios are used to identify points where a trader may enter or exit the market. Additionally, if a resistance level is broken, it can signal the market's turn to a bearish or bullish run. In crypto trading, these ratios are important to know when it's time to buy or sell a token.
Conclusion
In this article, we have introduced the basic topics of Technical Analysis. It is a very broad and complex topic, and it has many more advanced subjects. But for anyone looking to do crypto trading, starting with the basics is important.\
Now, to take the next step read 2021 Best Exchanges to Buy (Trade) Altcoins: The Ultimate Checklist. For a comprehensive list of the best place to trade crypto, and begin using what you have learned. The crypto economy is on fire, and now it is the time to enter the market.
