How do you determine price action during trading? What do you do to explore the historically important levels of prices?
How do you guess that trends are breaking? You will USE a TECHNICAL ANALYSIS for this!
But many people think TA doesn’t work in crypto. Is it true or just a misconception?
To know this read out the answer to the question: Does Technical analysis work in crypto?
Yes, they do work in crypto. They help traders to understand the market sentiments by studying charts, patterns, and trends. This way, traders can compare the historical data of prices and make future investment decisions.
However, one can’t say that the success of trade in crypto is solely dependent on technical analysis.
There are many other contributing factors also. If users of these tools are lacking the basic skills of applying them properly, they can’t put positive trades.
What Is Technical Analysis
Technical analysis means quantitative as well as statistical data to identify opportunities for trades.
They include charts, bars, patterns, signals, and lines to show price movement. In short, TA is the art of comparing the pattern of the current price to the previous price.
By comparing the history of a stock, traders predict about price and avail the chances of making a profit.
Does Technical Analysis Work in Crypto
Yes, they do work in crypto and they are far more important in studying the crypto market. However, relying on TA solely is not enough.
Charts of prices and volume indeed show all the previous buying and selling decisions of market participants. This data, in turn, impacts the psychology of future participants’ decisions.
It is common for traders psychology that they tend to focus on price when they buy assets. If the price moves down, they want to sell the asset.
Some traders determine common trends and chart patterns and make buying and selling decisions accordingly. Sometimes TA works and sometimes our psychology works.
How to Apply Technical Analysis in Crypto
Technical Analysis is important to make an investment decision. These are both qualitative as well as quantitative.
It helps traders to decide when to buy and when to sell cryptocurrencies. They are aimed at predicting price movement.
TA operates under three major rules:
- History repeated itself
- The market discounts everything
- Prices follow trends
Below are a few important concepts to learn how TA works in crypto:
Support and Resistance Level
Understanding the support and resistance levels is crucial for the crypto market. It helps you to get better knowledge about the supply and demand chain.
This way, you can decide your entry and exit points for a positive trade. Some experts claim that the support and resistance level analysis work quite well for Bitcoin as compared to other currencies.
When there is a support level, more and more traders are willing to buy. Here traders perceive crypto to be oversold.
While in resistance levels traders perceive stock or crypto as overbought. They are willing to sell it.
The concept of round numbers is easier to understand for even newbies. Whenever a round number approaches, bitcoin gains popularity.
This might be the result of the psychological impact of the round number on the financial market.
It is observed that traders love even numbers in the case of bitcoin such as $4k, $6K, $8k, $10k and it goes on.
Needless to say, market participants consider round numbers as a contributing factor. Whenever there is some financial news, bitcoin price shows an uptrend close to a big round number.
From the cryptocurrency chart, you can see when the price moves up, resistance starts to appear. When this resistance breaks, new barriers start generating at the mean spot.
When it comes to price movement or trends, volume plays a vital role. In cryptocurrencies, high volume signifies a high price trend.
As a trader, you should pay close attention to gain or lose. If any specific crypto is showing a large gain or loss, don’t ignore its volume.
For example, last December Bitcoin showed a large uptrend then declined rapidly. At that moment, it was worth watching whether the downtrend was the result of a new trend or so-called pullbacks.
Cryptocurrency trading high-volume coins are less rewarding as compared to low-volume coins. You might have heard of a less famous coin moving up a hundred percent.
This is because the amount needed to move the market up and down is quite less than the famous crypto and Ethereum coins.
Here, in this case, the crypto market moves with the contribution of more than one person. Low-volume coin charts can see dramatic spikes in price. So they are profitable and risky both to trade.
Advanced Technical Analysis Tools for Crypto
Like forex, the most Commonly used TA tools for crypto are charting patterns and statistical indicators. The interesting fact is that these tools are generated using similar data but they convey different information.
Let’s discuss advanced TA tools that crypto traders rely most on:
Candlestick Charts/Open High Low Close Charts
In crypto, different types of charts are in use such as candlesticks, bars, and lines. Among them, candlestick OHLC charts are more famous.
These are based on two facts:
- Opening and closing prices
- Day’s high and day’s low price
In this chart, candles are of two types:
- Bullish Candles: Price close lies above the opening
- Bearish candles: Price close is below the opening
Relative Strength Index RSI
RSI is a commonly used tool for the technical analysis of bitcoin. This indicator is somehow different from moving average indicators.
Through this indicator, the trader calculates the band between two extreme values to determine the magnitude of price movement.
It is a graphical band that helps to determine high or low prices on a relative basis. The width of the envelope shows the volatility factor.
When volatility is higher, the price of the asset fluctuates quickly. The volatility is low, the width of the envelope is relatively lower.
Moving Average Convergence Divergence (MACD)
This indicator is based on trends. It works on the value of two moving averages:
- Short Term Average
- Long Term Average
These two values are shown by blue and orange lines. When the blue line is above the orange line, the possible momentum would be bullish.
Whereas the orange line is above the blue line, the momentum is bearish.
Frequently Asked Questions
How is a cryptocurrency used in technical analysis?
To understand how crypto is used in technical analysis you need to know the following concepts:
- Reading Candlestick Charts. …
- Gaining Basic Information from Candlestick Charts.
- Trend Lines. …
- Determining Support and Resistance Levels. …
- Understanding Trading Volumes. …
- Knowing Market Caps.
Does Bitcoin follow technical analysis?
Yes, Bitcoin is no exception it does follow the TA. Traders can predict market sentiments by studying charts, trends and price move through technical tools.
Does TA work in forex?
Yes, they do work for forex up to a certain extent. Traders study price from charts and predict its future movement. TAs in Fx represent sentiments of traders behind a price move.
Lastly, Technical analysis is workable for crypto. They are extremely useful for risk management.
They give a visual representation of the appropriate level of trade. Furthermore, they tell us what percentage of loss a trader can withstand.
Keep one thing in your mind that not all technical analysis tools are equal. The effectiveness of tools depends on how users use them.
So, it’s not fair to blame technical tools if the trader cannot apply them properly.