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How to learn cryptotechnical analysis
Technical analysis is a method for determining how and when to trade an asset and predict possible price movements by examining past market data. Unlike fundamental analysis, technical analysis does not attempt to determine the true price of an asset. Instead, it relies on asset price history.
Technical analysis is based on the Dow theory, named after its creator Charles Dow. This theory consists of six main ideas.
1. The market devalues everything. According to this idea, the price of an asset already includes all the information about that asset, including market sentiment and traders’ expectations.
2. There are three types of market trends. Price movement is not chaotic; he moves in trends. There are primary or major trends lasting from a few months to over a year. Within primary trends, there are secondary trends that are often retracements to the primary trends and usually last for several weeks. Finally, there are short or minor trends that last less than one or two weeks.
3. There are three phases of major trends. Any primary trend has three consecutive phases:
- Accumulation. At this stage, experienced traders begin to buy or sell an asset. Since there are so few of them, the price does not change much.
- Public participation. As more traders begin to notice and follow the new trend, the price starts to change rapidly.
- Distribution. Experienced traders begin to allocate their assets during a time of rampant speculation.
4. Indexes must confirm each other. The signals of one index must confirm the signals of another. From the point of view of the cryptocurrency market, this principle can be seen in the correlation between the movements of cryptocurrency pairs.
5. Volume must confirm the trend. If the price movement is accompanied by an increase in volume, then the price is moving in the trend direction. If the volume decreases, the price moves against the trend.
6. The trend continues until it gives clear signals about its reversal. The price is more likely to follow the current trend than change it. Reversals in major trends can be difficult to identify. Reversals are often confused with secondary trends.
How to read cryptocurrency technical analysis charts
There are many methods used in technical analysis, but they are usually of a certain type:
- Trading statistics: volumes, etc.
- Candlestick analysis
- Graphic patterns
- Resistance and support levels
- Technical indicators
Experienced traders usually combine several different techniques in their methods and wait for their mutual confirmation. A confirmed signal can be considered more reliable for decision making.
It is important to understand that you cannot know for sure how the price will move in the future. But you can determine which situations are likely to be suitable for opening a position and which are not. That’s why it’s always important to keep risk management in mind.
There is no perfect time frame for any coin at any given time. Longer timeframes are generally more important, but that doesn’t mean you won’t find good trades on shorter timeframes. Check multiple timeframes and evaluate trading opportunities accordingly.
The choice of timeframe depends on the trading strategy of the trader. So-called scalpers who open and close their positions quickly prefer very short time frames such as 1-minute or 5-minute charts. Intraday traders, who typically enter and exit trades within the same day, mostly use 5-minute, 15-minute or hourly charts. Finally, position traders who prefer a long-term approach to trading use daily or even weekly charts.
When the market fluctuates heavily, a shorter time frame is often more suitable for identifying the best entry and exit points than a longer time frame.
Trading volume plays an important role in the technical analysis of cryptocurrencies and other assets. Volume is the number of coins sold during the selected time period. Often displayed as a row of bars at the bottom of a price chart. The height of these columns serves as a visual identifier of the volume. Volume shows how serious the trend is. Stronger trends are accompanied by higher trading volume and vice versa.
Japanese candlesticks are the most popular chart type for reading and analyzing price charts. Each of these candlesticks shows the movement of the price of a coin during a selected period of time. Each candlestick consists of a body and up to two shadows and can be either green or red. The body is the difference between the opening and closing prices. If the body is green, its lower part shows the open price and the upper part shows the close price. For red candles, the opposite is true. Thus, the green candle shows that the closing price in this period was higher than the opening price, i.e. the price has risen. Green candles are called “bullish”. In turn, a red candle indicates a price decline and is called “bearish”.
This type of price chart is very useful because it shows us the most important information about price movement at a given time. We clearly understand whether the price rose or fell on the selected timeframe, and we see the maximum and minimum price values for this period.
Sometimes groups of candles fall into recognizable patterns with their own names. Let’s look at some of them.
Bullish reversal patterns
Bullish reversal patterns form after a price decline and indicate a possible trend reversal.
- The bullish hammer is a single candlestick pattern. The body of the candle is short with little or no upper shadow and a long lower shadow. This is a sign that the sellers are lowering the price for a period followed by strong pressure from the buyers who ended the period with a higher close.
- Bullish engulfing is a two candlestick pattern. The body of the second, bullish candle completely covers the body of the first candle, which is bearish. This pattern means that the buying pressure prevailed over the selling pressure, and the bullish move had stronger momentum than the bearish one.
- The morning star is a three candlestick pattern. It consists of a candle with a very small body between long bearish and bullish candles. In addition, the body of the middle candle does not intersect with the body of the bearish one. The pattern means that the selling pressure has been exhausted and the trend has become bullish.
Bearish reversal patterns
- The shooting star is a single candlestick pattern that is essentially the opposite of the bullish hammer pattern. The shooting star candle has a small body, almost no lower shadow and a long upper shadow.
- A bearish engulfing pattern is a two-candlestick pattern. As the name suggests, this is the opposite of the bullish engulfing pattern. It consists of the first bullish candle, the body of which is completely covered by the second bearish candle.
- Evening Star. As you may have guessed, this is the opposite of the morning star pattern. It consists of a candle with a very small body between two long candles, the first is bullish and the second is bearish.
Support and resistance levels
Support and resistance levels are key price levels where buyers or sellers, respectively, enter the market and make enough trades to stop or reverse the price movement. These levels are indicated by repeatedly touching the price without crossing it.
A support level is a level at which demand for an asset is strong enough to keep the price from falling lower. Support is always below the current price. Traders tend to buy at the support level, which pushes the price higher.
Resistance is the level at which the supply of assets is large enough to stop the price from rising. The resistance level is always above the current price. Traders tend to sell at resistance levels, which lowers the price.
As soon as the price breaks the resistance level, it becomes a new support. Likewise, if the price breaks through a support level and goes down, that support level becomes new resistance.
Indicators are specific calculations based on various statistics such as price and volume. Usually they are presented in a visual form (lines, histograms, etc.), which are automatically added to the chart. Indicators are designed as additional tools to help traders spot buy or sell signals. There are many indicators and they are widely used by short term traders.
Relative Strength Index
One of the most popular indicators is the Relative Strength Index (RSI). It measures the magnitude of recent price changes to identify overbought or oversold conditions in an asset’s price and fluctuates between 0 and 100. When RSI is above 70, the asset is considered overbought and there is a good chance of a price decline. When the RSI is below 30, the asset is considered oversold and there is a good chance that the price will rise. However, it is better to remember that the RSI, like other indicators, is only an auxiliary tool and should not be used as the main buy or sell signal for decision making.
The Best Cryptocurrency Technical Analysis Tools
Before the advent of computers and the Internet, technical analysis was done manually on paper. Now it is almost impossible to imagine without convenient computer tools.
Best Cryptocurrency Charts for Technical Analysis
Although cryptocurrency exchanges usually provide their users with some set of technical analysis tools, they cannot compete with specialized platforms in terms of convenience, versatility and power.
- TradingView is arguably the most popular charting and technical analysis platform. It can be used as a powerful cryptocurrency technical analysis software by both beginners and professional crypto traders. Its versatility and huge list of features make TradingView one of the best tools a trader can have. There are three paid plans available, as well as a free plan with less functionality, which is enough to get most traders started. There are three paid plans available, as well as a free plan with less functionality, which is enough to get most traders started.
- Coinigy is another popular platform that not only gives you access to cryptocurrency technical analysis charts and other tools, but also allows you to trade cryptocurrencies on multiple exchanges. This is a paid service, but there is a free starter account option.
- CryptoWatch is a cryptocurrency charting and trading platform owned by the Kraken cryptocurrency exchange. It is completely free to use for charting, but the premium plan includes some additional benefits.
Although the information provided here is only the basics of technical analysis, it can be very useful for cryptocurrency trading. Keep learning and you will reap the rewards of your perseverance.
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