New to the world of crypto trading? If yes, chances are you’re trying to figure out the tools that can increase your chances of conquering the market and achieving your end goals. Well, the good news is, there’s never a shortage of approaches to assess today’s crypto market. Moreover, one method you won’t be wrong to learn is Technical Analysis. With so much to gain and lose in the volatile cryptocurrency market, it’s only normal (and of course, crucial) to understand technical analysis. Remember, making the right decisions is key to achieving your goals.
First things First — What is Technical Analysis?
Technical analysis is an overarching term that’s used when you use existing, real-world data from the crypto market as leverage and attempt to plot it forward in the hope of predicting where it will go next. For the most part, tech analysis gives you the chance to predict when the market will be bearish (trending down) or bullish (trending up). And should things go as planned, you’ll be able to buy when the market price is low and of course, sell when it’s high. Of course, the primary goal here is to make a good profit.
Still, need a bit more explanation?
If yes, enter the fundamental ideas of Dow Theory; the basis of technical analysis of the financial market.
Here are few things you’ll want to keep in mind:
• The crypto marketplaces much emphasis on its pricing
First off, you should understand that the market considers everything in its pricing. In essence, both the previous and future details are already an integral part of the current asset prices. So yes, as crypto enthusiasts, we should be looking at several different variables including current, past and future demand coupled with rules that govern the market. Moving forward, the existing price is mainly a response to the current details which usually covers both the expectations and knowledge of every coin traded in the crypto market. And yes, technical traders can then figure out what the price indicates about market sentiment and eventually make wise and accurate predictions that pertain to future pricing.
• Prices movement follow trends
Here’s the thing; prices movement are not random. Yes, they basically (or often) follow long or short-term directions. For the most part, once a trend is formed by a coin, there’s a good chance of the price following the tendency to oppose it. So with technical analysis, traders can devise a way to follow trends and eventually profit from them.
• History does repeat itself
There are specific models of the behavior of the cryptocurrency market that tends to happen over and over again. So of course, it’s possible to predict the price future movement based on these models.
Tools in Technical Analysis
First off, trend lines are an essential tool in technical analysis. They’re typically used to give indications of a next trend and suggest when a trend has changed. In other words, trend lines can be used to identify and confirm biases. For the most part, these lines can be drawn along a trend to represent either support or resistance, depending on the direction of the pattern.
Essentially, crypto assets may have high volatility and of course, watching a crypto price movement chart could let traders in on many highs and lows that form a linear pattern. That said, technical traders can actually pay less attention to volatility and identify an upward trend upon seeing many higher highs. In a nutshell; trend lines make it easier to identify potential areas of increased supply and demand which can trigger the market to move up or down respectively.
It’s also good to point out that certain trend lines move sideways. And in this regard, a coin might not necessarily move left or right. So all in all, it’s crucial for traders to mindful of the movements.
Support and Resistance Levels
Moving forward, traders should know that there’s more to technical analysis than trend lines. Yes, they’ll also come across horizontal lines that indicate levels of support and resistance. For the most part, once we identify the specific values of these levels, it’ll be pretty easy to figure out the current supply and demand for the coin. First off, when we talk about securing profit in a volatile market like crypto, traders buy into a crypto asset when it’s around a level of support and expect that the support will hold. The big idea here is that traders believe that currency is reasonably priced at this level and of course, seek to buy accordingly. With this in mind, you should be aware that the high demand could stop the decline and even alter the momentum to an upward trend.
On the flip side, resistance is a price level whereby the selling pressure on a crypto asset is historically higher than the buying pressure. In essence, the coin encounters resistance from the market when it tries to break through that price level. It’s also noteworthy to mention that there are times when trade-offs can be between support and resistance levels. But of course, this typically happens when a trader identifies lateral movement in the market.
Trying to figure out how to identify trends in the event of false breakouts? If yes, you would want to consider using trading volume. At this point, you should be aware that strong trends usually come with a high trading volume and of course, weak trends come with a low trading volume. With this in mind, it’s always in your best interest check the particular volume that accompanies a coin when it goes down. Speaking of which, a long-term trend of healthy growth is usually accompanied by a significant volume of Increases and a low volume of declines.
Moreover, it’s crucial to check if “the said volume” is rising in the long-run. Finally, you should be aware that peradventure the volume starts decreasing during increases, the upward trend could stop. And as you probably guessed, it goes the other way round during a downtrend.
Next in line is this tool that’s primarily used to smooth out smaller fluctuations in a coin’s price. In other words, moving averages is a method that works to simplify trend recognition, and it’s typically based on the average price of a crypto asset over a specific period. As a crypto trader, you should have it in mind that there are several different types of moving averages. But right now, we’ll recommend focusing on exponential moving average and simple moving average. Essentially, the former determines the average price of an asset while giving more weight to more recent prices. And the latter (simple moving averages) determines the average price of an asset without any time bias.
So there you have it! These are just about every basic thing you need to know about technical analysis. Yes, at this point, chances are you’re ready to try out the approach and see how it works for your technical trades.
Well, that’s great! But you should also have it mind that you cannot be entirely sure of what will happen in the future. As we already know, technical analysis uses what has happened in the past to predict what will happen in the future, but of course, nothing is certain. In a nutshell; try not to put all eggs in one basket — don’t just rely on technical analysis.
Remember, nothing is certain in the crypto world!