When trading cryptocurrencies, technical analysis should be performed to achieve consistent results.
Some calculations need to be done to predict price fluctuations at the time of trading. Trading becomes gambling simply by placing buy and sell orders based on intuition and guesswork. One of the important things traders do to get information about what is happening in the market is technical analysis.
So what is technical analysis? And what tools and indicators do you need to do that?
What is technical analysis?
Technical analysis uses mathematical indicators to assess statistical trends and predict the price direction of the crypto market. This is done by looking at historical price volatility and volume data to determine how the market works and predict how it will affect future price volatility.
Technical analysis techniques evaluate crypto markets and identify trading opportunities through price trends and patterns found on charts. They are based on the belief that crypto past trading activities and price fluctuations are valuable indicators in determining future prices and activities.
Three basic assumptions behind technical analysis
Technical analysis is based on three assumptions, which are briefly described in this section.
1. Market discount itself
This assumption holds that everything in the market that can affect the price of crypto is reflected in that price. The price shows you everything you need to know about crypto assets. You do not need to consider the basic factors that affect crypto assets to determine price fluctuations.
For example, suppose you notice that the price of crypto assets is falling. You can use chart information such as candlestick patterns, degree of price drop, and other technical information to know if it is best to invest in such coins at such times.
2. Trend price fluctuations
Price actions always show trends, regardless of the time frame used, even with random market movements. Green and red candlesticks show price trend patterns and directions.
Prices are believed to follow the trend. Future price fluctuations are likely to follow established trends. Price trends can be up, down, or sideways (right).
3. History repeats itself
The repetitive nature of the crypto market means that analyzing previous patterns can help predict future market movements.
Market participants typically respond consistently to market events over time. Some chart patterns were formed long ago, but they are still considered important as they can occur again.
The following six tools and indicators are typically used to perform technical analysis when trading cryptocurrencies.
1. Candlestick chart
Traders prefer candlestick charts because they want to see more information about price fluctuations. Each candlestick represents the activity around the time frame selected for trade analysis. Therefore, if you are working within 4 hours, each candlestick will represent price fluctuations every 4 hours.
The candlestick consists of a body and a core. The body can be either green (increased) or red (decreased).
A green candlestick indicates that the transaction closed above the opening price. The base shows the opening price and the top shows the closing price. On the other hand, the red candlestick indicates that the transaction closed below the opening price. The candlestick core indicates whether the price is high or low within the time frame. The peak of the upper wick shows the highest price and the tip of the lower wick shows the lowest trading price.
2. Support and resistance
Understand the level of support and resistance Helps to easily interpret the key chart level. These are certain price levels that the market finds difficult to cross. The support level is the point where the price stops falling, and the resistance is the point where the market price cannot rise any further.
The support level seems to be a bounce spot for asset prices. When the market goes down to that point, it will pick up again. On the other hand, when the price rises to a resistance level that acts as an upper barrier, the price falls.
Once you have identified these levels, you can use them to create market price forecasts. Resistance is the point where bullish pressure stops and prices start to fall again, and support is the point where bullish reversals (in the case of price increases) are likely to occur.
3. Trend line
These are used to elicit potential market trends and take many forms. Traders also draw multiple trend lines to bring out more complex patterns. A trend line is a single line connecting various high and low price points. The more price points connect to the line, the stronger the trend.
4. Moving average
Indicators help track price trends by averaging past prices of crypto assets over a defined period of time. You can adjust the time frame to the appropriate time frame to generate reliable signals in real-time trading charts. Moving averages provide insights into the direction of the market and help determine the appropriate trading entry price.
There are two common types of moving averages. A simple moving average that shows the average of the total price over a specific period, and an exponential moving average that prioritizes the latest price without actually considering previous price fluctuations. The most commonly used moving averages are 10, 20, 30, 50, 100, and 200 day moving averages.
5. Relative strength index (RSI)
RSI is a vibration index This indicates whether the asset is overbought or oversold. It is measured in the range of 0 to 100. A crypto asset with an RSI value below 30 is oversold, and an RSI value above 70 indicates an overbought asset price. The overbought condition is a potential sell signal, and the oversold condition indicates a potential buy opportunity.
6. Bollinger Bands
This indicator is also useful for measuring price fluctuations in assets. Bands are typically measured using a 20-day simple moving average by adding and subtracting the standard deviation from the moving average. If the market price is above the upper limit of the Bollinger Bands, it is considered overbought, and if it is below the lower limit band, it is considered oversold.
Limitations of technical analysis
One of the main criticisms of technical analysis is that it becomes inaccurate because history is not repeated in exactly the same way. These critics believe that price patterns are not very useful.
Another criticism of technical analysis is that it only works in some cases and produces inconsistent results.
Technical analysis is also limited to studying chart patterns and market trends. It ignores the aspect of studying how the crypto community works or other fundamental factors that influence prices.
Technical analysis is relevant and insightful only if the market moves in a particular direction. It is not possible to predict movements that require basic background analysis.
Technical analysis is not enough
The above technical tools and indicators are Your crypto trading strategy. Many traders rely on technical analysis to make trading decisions. In fact, some believe only in technical analysis. However, combining technical and fundamental analysis is considered a more rational approach to trading.
While technical analysis provides information on market trends, especially short-term trends, fundamental analysis usually provides information that can guide long-term investment strategies. By doing a fundamental analysis, you will also notice short-term market sentiment. Combining technical and fundamental analysis will give you better trading results.