In today’s article, we are going to explain to you what it is and how you should perform technical analysis of cryptocurrencies. In the world of trading, technical analysis is the step before starting to operate. That is why you must learn your lesson well so as not to take a wrong step.
It is essential to know how to read charts and their context well, such as the chart trend, entry and exit patterns, supports and resistances, etc. My advice is not to overwhelm yourself with too many technical concepts, because there are infinite tools and indicators.
What is Cryptocurrency Technical Analysis?
Technical analysis is the study of price movements using charts. If you want to make money in the stock market; We at the School like to distinguish between four types of operations. The AT is not always right, but it does help make sense of the ebbs and flows of the market. It does not say what will happen, but what is possible that will end up happening.
Cryptocurrency technical analysis
To carry out a good technical analysis you must use several factors (we show them below). You can add those that seem most interesting to you, but without these, you won’t go anywhere.
1. It is important to look at the trend
The trend shows the advance of a price. In real markets, the price fluctuates constantly. So a truly authentic trend will always have fluctuations. But the trend can have different lines: bullish, bearish, fatigued, parabolic…
If you want to discover more about this, in the article ‘ Trend Lines in Trading’ you will find more data. But remember, the market is an environment of probabilities: Not all trends weaken before they run out, nor do all trend weaknesses end up killing them (some trends regain their lost vigor and resume their march).
2. Technical analysis tools for cryptocurrencies
The tool most used to visualize and analyze values in a given time (1 day, 1 month, 2 weeks, 30 minutes…) are Japanese candlesticks, which show price information: opening price, closing price, highest price of the period (week, month…) and lowest price. Various indicators are also used such as volume, the Relative Strength Index (RSI), the moving average, etc.
1. Japanese candles
Japanese candlesticks are those that show the evolution of the price of an asset at a specific time. Contrary to what many think, interpreting them is not like learning the phone book by heart, but rather a matter of common sense. Currently, there are 4 types of Japanese candles: the overwhelming ones ( marubozu and variants), the Quieroynopuedo (hammer / hanging man, shooting star and variants), the nifunifá ( doji and variants), and all the others.
The color is indifferent because what we deduce for a certain bullish candle, we would also deduce for a bearish candle of the same shape and size, only rotated 180º.
In the following image, above left, we can see that in this example we have the graph of Amazon, the famous American company for e-commerce and cloud computing services at all levels.
Additionally, marked with a red circle (top center), we see that this is a daily trading chart. This is called a Japanese candlestick chart, so each candle represents one day. There are trading charts where the candles represent weeks or minutes, but this one is daily.
2. Technical indicators
Technical indicators are those that help determine the future behavior of the market. There are different indicators, which are used for specific moments and show price variations.
But remember that there is no magic indicator and that the vast majority of technical indicators are mathematical variations in price and, sometimes, combined with volume or other market-related aspects. That is why it is vitally important that you look at the divergences, that is, the contradictions between the price movement and that of a particular technical indicator (you can see this on a stock market chart). If one goes up, the other goes down, and vice versa.
The way to read an indicator when looking for divergences is as follows:
- You have to look at the price and indicator at the same time.
- The indicator can reinforce or contradict the price.
- A divergence is when it contradicts it: You should think that the price is lying to you and that the trend can change in the direction indicated by the indicator.
3. Other technical indicators
Other indicators such as the Relative Strength Index (RSI) are also used in the technical analysis of cryptocurrencies. The value of the RSI indicator oscillates between 0 and 100, marking two important zones: Above 70 and below 30. When the RSI indicator is below 30, we say that it is “ oversold ”. At this time, as tension grows due to excess sales, the expectation is that the price will tend to reduce that tension and move upward. The interesting thing here is to position yourself long. When the RSI indicator is above 70, we say that it is “ overbought ”. Just the opposite happens, so what is expected is that the price will fall, so we would have our eyes set on the shorts. As you already know, you need to take more contextual elements into account (for example, when the price reaches a relevant level).
On the other hand, triangles make up a fundamental part of technical analysis. These trading indicators can reveal great data about the current market situation, but they can also point out the imbalance between whales and shrimp (for us, known as minnows).
Additionally, you can use other technical indicators such as moving averages, which rely on past data to provide an average value. The best-known moving averages are those that are applied to the price, thus drawing a line that goes up and down, following its movement.
In short, there are countless strategies when operating and the important thing here will be risk control.
Importance of AT with cryptocurrencies: advantages and disadvantages
Although technical analysis is important because it is based on reading charts, it uses the movement patterns that the assets follow as support. Therefore, it has advantages and disadvantages that influence future movements.
Technical analysis has the following advantages :
- Offers the ability to determine an exit and entry price.
- It can be used for various time windows (minutes, hours, days, etc.), as well as to make short-, medium-, or long-term investment decisions.
- It allows you to record the market trend, to observe where prices are heading.
However, it also has disadvantages :
- Be careful not to use too few or too many indicators. It can affect the performance of your strategy.
- Remember that not everything is predictable, especially sharp price drops.
Technical analysis or fundamental analysis?
Technical analysis studies the price history using a graph, while fundamental analysis focuses on analyzing the internal and external information that determines the value of a cryptocurrency. This is the main difference between the two. But is one better than the other?
The answer is no. Both are valuable ways to better understand an investment. Additionally, both can serve as a basis for creating a trading system and identifying when to buy or sell a specific asset.
The world of trading is one of the most important in the world of Forex (and other products). There are countless strategies when it comes to trading, but the important thing is that you do the most basic thing well: analysis. If you study the world of patterns, you will surely increase your success rate. Therefore, I recommend that you click on the following link and join the community.