Key Takeaways: Cryptocurrency Technical Analysis
- The relation between technical and fundamental analysis
- Meaning of technical analysis
- Key pointers that showcase the historical significance of technical analysis
- Importance of analysis, time frame, candlestick, trading volume, support and resistance, and trend lines
- The usefulness of technical indicators like RSI, Bollinger Bands, and more
Contemplating crypto investment in 2021? Well, make your research airtight by understanding price movements better with cryptocurrency technical analysis.
Cryptocurrency Technical Analysis: Why do we need it?
Isn’t fundamental analysis good enough to identify the best crypto players? Long story short— fundamental analysis of a cryptocurrency is a rewarding tool if you are planning to go long. However, pairing it with technical analysis helps you save a lot of time. Sounder investments are then possible as you can determine the exact price to enter or exit the asset.
Still, technical analysis is far from anything random. To make accurate predictions in the long and short run, you must be aware of these basic principles related to the crypto-space
- Prices trend at all times, depending on the timeframe of analysis
- Technicals thrive on historical data
- Price action indicators are subjective
- Short term movements are more volatile
Put plainly, technical analysis sharpens your investment research that starts with reading into the micro and macroeconomic movements, competitive landscape, and industry conditions. Plus, the aforementioned principles form the backbone of every tool we use to supplement our discussion.
Cryptocurrency Technical Analysis: A Sneak Peek into the Granular Details
As mentioned, cryptoanalysis takes both fundamental and technical aspects into consideration. While fundamentals are good long-term indicators, technical insights let you into patterns, trends, and price actions, which are more reliable buying and selling pointers.
Technical analysis, therefore, helps you understand the present market sentiment and even empowers you to predict asset-specific price movement accurately, with historical volume and price data to work with.
Basics of Cryptocurrency Technical Analysis: Key Pointers to Understand
If the very concept of technical analysis feels overwhelming at times, consider breaking it down into more granular, metric-based elements. Here are the key pointers that would set you straight for the more complex concepts to come.
- Technical insights are strictly quantitative.
- Users statistical and mathematical modeling
- Concerns price behavior
- Prices always move in identifiable trends
- Crypto market discounts every sentiment and aspect
- Tool-intensive analysis
- Requires you to read trade statistics and chart patterns
As per the pointers, you can infer one important yet obvious fact. Technical analysis has the primary aim of helping you determine the market future, especially by using real-time and historical data. To surmise more efficiently, technical analysis strives at proving a simple concept, i.e., ‘History Repeats Itself.’
So, if you are an investor, keep calm and read along.
Important Elements of Cryptocurrency Technical Analysis
Before moving ahead, we need to clear out one important thing about technical analysis. The trick to analyzing the crypto-space and price movements accurately is by reading the chart to perfection. But for reading chart patterns and even superimposing technical indicators to understand trends and price movements better, there are some important elements to know about beforehand.
Time Frame of Analysis
If you plan on investing in cryptocurrency with technical analysis as the backbone of your research, pinpointing the timeframe of analysis becomes equally important. Traders prefer shorter timeframes, whereas long and medium-term investors are more inclined towards checking multiple ones for a more comprehensive analysis.
Also, as a positional trader or even a long-term investor, daily and even weekly timeframes take precedence. But, in a volatile market, shorter time frames are better to find the desired entry and exit points.
You must have leisurely glanced over those candlestick charts while trying to technically analyze a crypto coin. While the candlesticks might look insignificant as standalone entities, their collation in cryptocurrency technical analysis charts reveals a lot about the price-specific changes.
Also, candlesticks reveal several important things about how the cryptocurrency is moving in the price-time continuum for a given timeframe. As per the design, the body of the candle determines the price fluctuation, whereas the color reveals how the prices have fared in time. Finally, green or bullish candles have opening prices at the lower end and closing prices at the upper end of the candle.
For red or bearish candles, though, the inverse is true. Also, the elongated pins reveal the highest and lowest price for the given timeframe, depending on the candle.
Basics of Candlestick Analysis
But aren’t standard line-based pricing indicators good enough?
Nothing against line-based charts but candlesticks often end up getting clubbed into recognizable patterns, which are handy in deciphering the price movements.
Just to make this discussion a bit more productive, we have enlisted a handful of candlestick patterns that give an accurate picture of the continuing and reversing trends:
- Bullish hammer comes across as the simplest of candlestick patterns, represented by a single candle. This pattern signifies lower pricing with heavy selling pressure at the beginning, followed by an active takeover by the buyers to end the period on a high. The upper wick of the candle, however, determines the permanency of the bullish influence.
- Bullish engulfing pattern is a basic two-candle design where one long-bodied bullish candle completely covers the first bearish candle, showcasing the dominance of buyers.
- Morning star is a three-candle, bullish pattern with a small-bodied candle placed between a bearish and a bullish candle, without overlapping with the former. This pattern reveals the end of selling pressure and the beginning of a bullish trend.
- An inverted, bearish shooting star is a one-candle indicator, boasting a long upper shadow and a massive buildup of sellers on the counter.
In addition to these patterns, you can also be on the lookout for bearish engulfing and evening star patterns to determine other bearish responses with accuracy.
If you are already good at charting, you would know how important it is to analyze the cryptocurrency according to volume. This figure denotes the number of coins traded within a given timeframe and is signified as vertical bars. Plus, the height of the bar, either green or red, determines the strength of a trend or price movement.
The direction in which the crypto moves is often revealed by trend lines. While your crypto investing and trading platform might already allow you to generate automatic trend lines, you can even draw them manually by placing the first point at the lowest price of a candlestick for a given time frame and then extending it to touch the lower point of the next candlestick.
Proper trend line design reveals the neckline for the cryptocurrency, which then hints at the patterns, breakout zones, retracement points, support, and even resistance levels.
Every crypto trade requires you to understand the key resistance and support levels that can even be drawn on charts as horizontal lines. At support, the buying volume is higher, which keeps the price from dropping freely. At resistance, short-term sellers prefer exiting their positions, which makes it harder for the asset to scale newer heights.
How to Use Technical Indicators?
Now that you are aware of the key technical elements, it is important to discuss a handful of technical indicators to analyze price actions with accuracy. Some of the more reliable ones include:
- RSI: Relative Strength Index is a momentum-specific indicator used for analyzing and determining price change magnitude and the future of the price movement
- Standard deviation: More of a concept that sheds light on the historical volatility by scrutinizing the RoR (Rate of Return)
- Bollinger bands: A lagging tool to determine the price highs and lows relative to the moving average
- Directional index: Standard indicator for helping you analyze the trend strength
In addition to these fundamental indicators, you can even rely on some of the complex ones like moving averages, MACD, VWAP, TWAP, Fibonacci ratios, and more to get a cohesive idea of how the price for a given cryptocurrency has fared over time and how is it expected to proceed.
As much as technical analysis sounds holistic and all-inclusive when it comes to determining the probabilistic and historical price movements, a crypto investor must use it with fundamental analysis. The long-term approach should therefore be to first identify players as per the fundamentals and then take positions by identifying the correct entry levels, obviously with the help of technical analysis.
FAQs on Crypto Analysis
Q1. How to learn cryptocurrency technical analysis?
A1. Learning crypto technical analysis requires you to understand the multiple charting elements. And you also need to discern technical indicators and even the key support and resistance levels.
Q2. How to technically analyze cryptocurrency?
A2. The most basic yet credible way to technically analyze cryptocurrency from an investment point of view is to look at the RSI and RSI divergence levels. More often than not, the trends revealed using these indicators are accurate.
Q3. How to do technical analysis of Bitcoin?
A3. Technical analysis of Bitcoin requires monitoring of moving averages. This is to determine entry and exit points, RSI for recognizing the zone Bitcoin is in, and standard deviation. However, the last element is to understand the changes in the annual ROR.
Confident about crypto technicals! Head over to the relevant app store and download the app to get started with crypto trading.
P.S: KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing.
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
Table of content
Subscribe to Our Newsletter with exclusive content.