The unique characteristics of the cryptocurrency markets have made technical analysis and charting invaluable in helping to predict direction, momentum, and support and resistance.
This article provides a brief outline of some of the more advanced popular technical analysis methods available to analyze cryptocurrency markets such as Bitcoin. If you are not familiar with technical analysis, please read our crypto technical analysis guide for beginners.
Each has its own characteristics and investors are encouraged to study each to determine whether it fits their particular trading style and risk tolerance.
Japanese candlesticks
Japanese Candlesticks are a technical analysis tool that can be beneficial to cryptocurrency traders because they provide key data for traders for various time frames in single price bars.
Although cryptocurrencies are extremely different from traditional assets, they are still charted in the same way with the price action identified by the open, high, low and close (OHLC). The OHLC uses candlesticks to build patterns that predict price direction once completed.
According to research and backtesting, there are five candlestick patterns that perform exceptionally well as precursors of price direction and momentum. Each candlestick pattern works within the context of surrounding price bars to predict higher or lower prices.
The most accurate candlestick patterns fall into categories identified as reversals and continuations. Candlestick reversal patterns predict a change in price direction, while continuation patterns predict an extension in the current price action.
Since cryptocurrencies tend to have a strong upside bias, traders looking to use candlestick formations to improve their trading skills should focus on chart patterns that tend to predict bottoms or a continuation of the uptrend.
For example, the five bullish candlestick patterns that investors should focus on during Bitcoin’s historic bull market rally are called The Hammer, The Bullish Engulfing Pattern, The Piercing Line, The Morning Star and The Three Soldiers.
The Hammer is a bullish reversal pattern, indicating that an instrument is approaching a bottom point in a downtrend. Hanging Man – the opposite.
The Bullish Enulfing Pattern is a two-candle reversal pattern that appears in a downtrend. The Piercing Line also appears in a downtrend:
The Morning Star is seen as a sign of hope and a new beginning in a gloomy downward trend.
The Three Soldiers pattern is usually noticed after a period of downtrend or in price consolidation.
Elliott wave analysis
The Elliott Wave Principle is a form of technical analysis that cryptocurrency traders use to analyze market cycles and predict market trends by identifying extremes in investor psychology, highs and lows in prices and other collective factors.
Elliott Wave traders believe that markets are affected by collective investor psychology, or crowd psychology, and that they move between optimism and pessimism in natural sequences.
This seems to be a discipline suited to cryptocurrency traders as at this time they are driven solely by investor psychology as there are no true underlying fundamentals supporting its price rise other than aggressive buying due to limited supply.
The key to success when using Elliott Wave analysis is to get the wave count right. Traders using this technique believe that the market moves in waves and that price action is primarily driven by groups of five waves as follows:
It takes years to master Elliott Wave analysis, but some cryptocurrency traders feel they have a good grasp of the basics to apply it to markets like Bitcoin.
Fibonacci levels
Fibonacci levels are an outgrowth of Elliott Wave Analysis. Simply put, it is a way to find possible support and resistance levels in a cryptocurrency market.
For example, after making a high/low range, traders expect a market to retrace 38.2% to 61.8% of this range to set up the next potential buy or sell opportunity. Both are Fibonacci levels.
Conversely, after making a bottom, for example, a trader will try to predict the next rally by applying math to the price action. Traders use Fibonacci level to estimate the trend length and trend corrections.
Stochastic and Relative Strength Index (RSI)
Stochastics and the Relative Strength Index (RSI) are known in the technical analysis field as oscillators because they move between a low of 0 and a high of 100. Some cryptocurrency traders use it to determine the strength of a trend or to predict tops and bottoms due to overbought and oversold conditions. Since Bitcoin prices often trade in an overbought or oversold state due to its high volatility, RSI indicator signals traders to enter or exit a certain position.
They both work under the assumption that prices should close near the highs of a trading range during upswings and towards the bottom of a trading range during downswings.
During a long move down, the oscillators will approach 0, indicating that a bottom may be near. During a long uptrend, the oscillators will be near 100, indicating that a top may be near. In the attached chart, Bitcoin is currently at 81.92 (RSI), which means that Bitcoin is overbought and a correction is expected.
MACD or moving average convergence / divergence
The MACD is categorized as an indicator. It consists of two exponential moving averages that help measure momentum in a cryptocurrency.
The MACD compares short-term momentum and long-term momentum in a cryptocurrency market to indicate the current direction of momentum rather than the direction of price.
When the MACD is positive, it indicates that the cryptocurrency’s momentum is up. The opposite is true when the MACD is negative.
Ichimoku Clouds
An Ichimoku cloud is an indicator that defines support and resistance areas, identifies trend direction, measures momentum and provides trading signals. The “clouds” are formed between regions of moving averages plotted six months ahead, and the midpoint of the 52-week high and low plotted six months ahead.
Simply put, the overall trend is up when prices are above the cloud, down when prices are below the cloud, and flat when they are in the cloud itself.
Closure
When trading cryptocurrencies like Bitcoin using various technical analysis tools, it is important that you have a strong conviction in what you are trying to achieve, as each technique outlined in this article has its own characteristics.
For example, if you are a trend trader and use a trend indicator tool, you may not want to cloud your analysis with an oscillator because it can indicate that a market is overbought or oversold. In other words, learn the characteristics of each technical instrument before applying it to a real market. With the lack of fundamentals, the use of technical analysis indicators in cryptocurrencies and especially Bitcoin is essential for every crypto trader.
Effective Technical Analysis Tools to start with
TradingView: The famous charting and charting service, wide variety of options. Mostly free, except for premium paid features.
Coinigy offers a comprehensive charting service among all trading coins and crypto exchanges. You can register by following this link and get 30 days free trial.
CoinAnalyze: Brilliant website that identifies Japanese Candles patterns in major cryptocurrencies.
There’s Even More (2018)
Read the continuation guide here, which discusses Bollinger Bands, CCI, flags, pennants and more.
Disclaimer for Uncirculars, with a Touch of Personality:
While we love diving into the exciting world of crypto here at Uncirculars, remember that this post, and all our content, is purely for your information and exploration. Think of it as your crypto compass, pointing you in the right direction to do your own research and make informed decisions.
No legal, tax, investment, or financial advice should be inferred from these pixels. We’re not fortune tellers or stockbrokers, just passionate crypto enthusiasts sharing our knowledge.
And just like that rollercoaster ride in your favorite DeFi protocol, past performance isn’t a guarantee of future thrills. The value of crypto assets can be as unpredictable as a moon landing, so buckle up and do your due diligence before taking the plunge.
Ultimately, any crypto adventure you embark on is yours alone. We’re just happy to be your crypto companion, cheering you on from the sidelines (and maybe sharing some snacks along the way). So research, explore, and remember, with a little knowledge and a lot of curiosity, you can navigate the crypto cosmos like a pro!
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